compilation guide

ISLAMIC FINANCIAL SERVICES BOARD

COMPILATION GUIDE ON PRUDENTIAL AND STRUCTURAL

ISLAMIC FINANCE INDICATORS

GUIDANCE ON COMPILATION AND DISSEMINATION OF

PRUDENTIAL AND STRUCTURAL ISLAMIC FINANCE

INDICATORS FOR BANKING AND NEAR-BANKING INSTITUTIONS

OFFERING ISLAMIC FINANCIAL SERVICES (IIFS)

March 2007

The publication is available for download from
the IFSB website (

www.ifsb.org

)

Islamic Financial Services Board 2007. All rights reserved.
Brief excerpts may be reproduced or translated provided source is cited.

Contact information:
Islamic Financial Services Board
3rd Floor, Block A, Bank Negara Building,
Jalan Dato’ Onn,
50480 Kuala Lumpur, Malaysia
Tel

: + 6 03 2698 4248

Fax

: + 6 03 2698 4280

Email :

ifsb_sec@ifsb.org

ABOUT THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

The IFSB is an international standard-setting organisation that promotes and enhances
the soundness and stability of the Islamic financial services industry by issuing global
prudential standards and guiding principles for the industry, broadly defined to include
banking, capital markets and insurance sectors. The standards prepared by the IFSB
follow a lengthy due process as outlined in its Guidelines and Procedures for the
Preparation of Standards/Guidelines, which involves, among others, the issuance of
exposure drafts, holding of workshops and where necessary, public hearings. The IFSB
also conducts research and coordinates initiatives on industry related issues, as well as
organises roundtables, seminars and conferences for regulators and industry
stakeholders. Towards this end, the IFSB works closely with relevant international,
regional and national organisations, research/educational institutions and market players.

For more information about the IFSB, please visit www.ifsb.org

COUNCIL

Members*

H.E. Sheikh Salem Abdul Aziz Al
Sabah

Governor, Central Bank of Kuwait

H.E. Dr. Zeti Akhtar Aziz

Governor, Bank Negara Malaysia

H.E. Rasheed M. Al-Maraj

Governor, Central Bank of Bahrain

H.E. Dr. Salehuddin Ahmed

Governor, Bangladesh Bank

H.E. Dato Paduka Haji Ali Apong

Permanent Secretary, Ministry of Finance, Brunei
Darussalam

H.E. Dr. Farouk El-Okdah

Governor, Central Bank of Egypt

H.E. Dr. Ahmad Mohamed Ali

Governor, Islamic Development Bank

H.E. Burhanuddin Abdullah

Governor, Bank Indonesia

H.E. Tahmasb Mazaheri

Governor, Central Bank of the Islamic Republic of
Iran

H.E. Dr. Umayya Toukan

Governor, Central Bank of Jordan

H.E. Dr. Shamshad Akhtar

Governor, State Bank of Pakistan

H.E. Sheikh Abdullah Saud Al Thani

Governor, Qatar Central Bank

H.E. Hamad Al- Sayari

Governor, Saudi Arabian Monetary Agency

H.E.

Heng

Swee

Keat

Managing Director, Monetary Authority of
Singapore

H.E. Dr. Sabir Mohamed Hassan

Governor, Bank of Sudan

H.E.

Sultan

bin

Nasser

Suwaidi

Governor, Central Bank of the United Arab
Emirates

* In alphabetical order of the country which the member represents

TECHNICAL COMMITTEE

Chairman

Dr. Abdulrahman A. Al-Hamidy – Saudi Arabian Monetary Agency

Deputy Chairman

Dr. Mulya E. Siregar – Bank Indonesia

Members*

Mr. Khalid Hamad Abdulrahman Hamad

Central Bank of Bahrain

Mr. Hamid Tehranfar

Central Bank of the Islamic Republic of Iran

Mr. Ibrahim Ali Al-Qadhi

Central Bank of Kuwait

Mr. Bakarudin Ishak

Bank Negara Malaysia

Mr. Azhar Kureshi

State Bank of Pakistan

Mr. Mu'jib Turki Al Turki

Qatar Central Bank

Dr. Sami Ibrahim Al-Suwailem

Islamic Development Bank

Mr. Chia Der Jiun

Monetary Authority of Singapore

Mr. Osman Hamad M Khair

Bank of Sudan

Mr. Saeed Abdulla Al-Hamiz

Central Bank of the United Arab Emirates

* In alphabetical order of the country which the member represents

TASKFORCE ON PRUDENTIAL ISLAMIC FINANCE DATABASE

Members*

Pengiran Ismail Yussof

Brunei Ministry of Finance

Mr. Riza Haryadi

Bank Indonesia

Mr. R. Eko Adi Irianto

Bank Indonesia

Mr. Behzad Fakhar

Central Bank of the Islamic Republic of Iran

Dr. Mohamad Mouhib Yassine

Banque du Liban

Ms. Noor Wati Khanafi

Bank Negara Malaysia

Ms. Azmah Abd. Karim

Bank Negara Malaysia

Mr. Muhammad Akhtar Javaid

State Bank of Pakistan

Mr. Abdullah Alfouzan

Saudi Arabian Monetary Agency

Dr. Abdullateef Bello

Islamic Development Bank

Mr. Elhadi Salih

Bank of Sudan

* In alphabetical order of the country which the member represents

iii

SECRETARIAT, ISLAMIC FINANCIAL SERVICES BOARD

Professor Rifaat Ahmed Abdel Karim

Secretary-General

Abdullah Haron

Assistant Secretary-General

Dr. V. Sundararajan

Consultant

Associate Professor Dr. Syed Musa Al-
Habshi

Consultant

Mr. Azrul Azwar Ahmad Tajuddin

Assistant Project Manager

TABLE OF CONTENTS

GLOSSARY OF TERMS ……………………………………………………………………….viii

LIST OF ABBREVIATIONS AND ACRONYMS ...............………………………………… xiii

CHAPTER 1: INTRODUCTION………..………………………………………………………...1
1.1 BACKGROUND

…...………………………………………………………………….…….1

1.2 OBJECTIVES OF THE PIFD……………………………………………..........................3

1.3 OBJECTIVES OF THE COMPILATION GUIDE ON PSIFIs……………………………4

1.4 PIFS AND OTHER EXISTING MACROECONOMIC STATISTICAL SYSTEMS……..4

1.5 SOURCES OF UNDERLYING DATA FOR PSIFIs………………………………………5

CHAPTER 2: OVERVIEW OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY………6
2.1

COMPOSITION OF THE ISLAMIC FINANCIAL SERVICES
INDUSTRY…………………………………………………………………………………...8

Islamic banking and near-banking services…………………………………………….. ..8
Non-banking financial services (other than insurance and capital market)…………. ..9
Islamic insurance services,or Takaful…………………………………………………… 10
Islamic capital market services……………………………………………………………11
Islamic financial architecture and infrastructure………………………….……………...12

2.2 SCOPE OF COVERAGE AND APPLICATION OF THE COMPILATION GUIDE…..13

Institutional coverage: banking and near-banking IIFS…………………………………13
Data coverage: types of SharÊ’ah compliant contracts………………………………….14

CHAPTER 3: REPORTING POPULATION…………………………………………………...17
3.1 REPORTING CENTRAL BANKS/MONETARY AUTHORITIES OR OTHER

RELEVANT SUPERVISORY AUTHORITIES (COUNTRIES) OR PIFS
COMPLIERS………………………………………………………………………………...I9

Eligibility criteria……………………………………………………………………………..17
Present status……………………………………………………………………………….17

3.2 REPORTING FINANCIAL INSTITUTIONS OR PIFS SUPPLIERS

Eligibility criteria……………………………………………………………………………..18
Present status……………………………………………………………………………….19

CHAPTER 4: THE SCOPE AND USE OF INTERNATIONALLY COMPARABLE PSIFIs

……………………………………………………………………………………………….21

4.1 THE USE OF PSIFIs AND MACROPRUDENTIAL ANALYSIS……………………….21

Definition of macroprudential analysis……………………………………………………22
Integration into and inter-relationships of PIFS with other macrostatistics…………...23
Peer group analysis………………………………………………………………………...23

4.2 SPECIFICATION OF PIFS, PIFIs AND SIFIs…………………………………………..24

Concepts of underlying data series……………………………………………………….24
The PIFI framework…………………………………………………………………………25
I. Capital adequacy………………………………………………………………………...26
II. Asset quality ……………………………………………………………………………..29

III.Management……………………………………………………………………………...30
IV.Earnings and profitability………………………………………………………………..30
V. Liquidity…………………………………………………………………………………...30
VI. Sensitivity to market risks………………………………………………………………31
Calculations of PSIFIs……………………………………………………………………...32
Exposition of PSIFIs………………………………………………………………………..34
I. PIFIs and SIFIs…………………………………………………………………………..34
A. PIFIs………………………………………………………………………………………36
B. SIFIs………………………………………………………………………………………41
II. Capital-based, asset-based and income and expense-based PSIFIs……………..44
Relationship with FSIs……………………………………………………………………...45
Extent and limitations of PSIFIs…………………………………………………………...49

4. 3 COMPILATION AND DISSEMINATION OF PIFS AND PSIFIs………………………49

Compilation of PIFS and PSIFIs…………………………………………………………..50
I. Availability of underlying data series…………………………………………………..50
II. Aggregation and consolidation for the purpose of PIFS and PSIFI compilation….50
A. Compilation of group-level underlying data …………………………………………..51
B. Compilation of sector-level underlying data ………………………………………….52
Dissemination of PSIFIs……………………………………………………………………53

CHAPTER 5: ACCOUNTING AND REPORTING PRINCIPLES…………………………...56
5.1 UNDERLYING ACCOUNTING PRINCIPLES FOR PSIFIs……………………………56

Brief definitions of flows and positions relevant to IIFS

…………………………………

Basis definitions of flows and positions relevant to IIFS………..………………………56

I. Periodic

recognition……………………………………………………………………57

II. Ownership and control……………………………………………………….............64
III. Measurable economic value by forms of transactions…………………………....58
IV. Income recognition by forms of transactions….………………….........................59
V. Distribution based on profit-sharing…………….……………………………………60

Arrears……………………………………………………………………………………….62
Contingencies……………………………………………………………………………….62

5.2 VALUATION………………………………………………………………………………...62

Valuation of transactions…………………………………………………………………...63
Valuation of positions……………………………………………………………………….63

CHAPTER 6: ACCOUNTING AND REPORTING FRAMEWORKS; SECTORAL
FINANCIAL STATEMENTS AND MEMORANDUM SERIES……………………………….64
6.1 ACCOUNTING AND REPORTING FRAMEWORKS…………………………………..64

IncomeStatement ………………………………………………………………………....72
I. Revenue or income ………………………………………………………………...…...64
II. Expenses ………………………………………………………………………………...65
III.Gain ……………………………………………………………………………………....66
IV.Loss ……………………………………………………………………………………....66

V. Return on PSIA …………………………….…………………………………………..66
VI. Net Income (or net loss)..………………………………………………………………66

Balance Sheet ………………………………………………………………………………76
I. Assets …………………………………………………………………………………...68
II. Liabilities ………………………………………………………………………………..77
III. Equity of unrestricted PSIA ………………………………………………………...…69

IV. Owner’s equity………………………………………………………………………….69
Statement of Restricted Investments……………………………………………………..72
I. Restricted investments………………………………………………………………… 72
II. Deposits by holders of restricted PSIA or their equivalent…………………………72
III. Withdrawals by holders of restricted PSIA or their equivalent…………………….72
IV. Profit (or loss) of restricted investments before the IIFS’ share in investment

profit………………………………………………………………………………………81

V. IIFS’ share of investment profit as an investment manager………………………...73

Memorandum Series

…………………………………………………………………….

6.2 SECTORAL FINANCIAL STATEMENTS AND MEMORANDUM SERIES………….78

Income Statement…………………………………………………………………………..78
Balance Sheet………………………………………………………………………………82
Statement of Restricted Investments……………………………………………………..87
Memorandum Series…………………………………………………………………….....91

CHAPTER 7: METHODOLOGIES OF AGGREGATION AND CONSOLIDATION OF

DATA ………………………………………………….…………………………99

7.1 CONCEPTS AND PRINCIPLES FOR AGGREGATION AND CONSOLIDATION 99

Institutional units, institutional sectors and sectors by economic activities…………..99
I.Institutional units……………………………………………………………………….….99
II.Institutional sectors……………………………………………………………………...100
III.Sectors by economic activities or industries…………………………………………101
Economic territory and centre of economic interest…………………………………...102
I.Economic territory of a country…………………………………………………………102
II.Centre of economic interest……………………………………………………………102
Flows, stocks and positions………………………………………………………………103
I.Flows ……………………………………………………………………………………..103
II.Stocks ……………………………………………………………………………………104
III.Positions ………………………………………………………………………………..104
Residence vs. non-residence…………………………………………………………….105
I.Residence ………………………………………………………………………………..105
II.Non-residence …………………………………………………………………………..106
Subsidiaries, associates, joint ventures and branch offices…………………………..106
I.Subsidiaries………………………………………………………………………………107
II.Associates………………………………………………………………………………..107
III.Joint ventures…………………………………………………………………………...107
IV. Branch offices………………………………………………………………………….108
Types of control and/or ownership………………………………………………………108
I.Domestically controlled IIFS…………………………………………………………….108
II.Foreign controlled IIFS………………………………………………………………….108

7.2 AGGREGATION, CONSOLIDATION AND NETTING ISSUES……………………..108

Aggregation………………………………………………………………………………...109
Consolidation………………………………………………………………………………109
Netting………………………………………………………………………………………110

7.3 GUIDANCE ON AGGREGATION AND CONSOLIDATION OF DATA………...111
Resident aggregated-based approach………………………………………………….111
Consolidated-based approach…………………………………………………………...112
I. Consolidated group reporting…………………………………………………………112
II. Domestically controlled, cross-sector consolidated method……………………….112

vii

III.Domestically consolidated method or national residency consolidation basis…..113
IV.Domestically controlled, cross-border consolidated method………………………113
V. Cross-border consolidated method or global consolidation basis………………...114
VI. Foreign-controlled, cross-border consolidated method……………………………114
Domestically consolidated vs. cross-border consolidated..…………………………..114
I. Domestically incorporated IIFS which have no overseas branches and/or banking
subsidiaries

and/or

associates…………..……………………………………………115

II.Domestically incorporated IIFS which have no overseas branches and/or banking

subsidiaries but have overseas banking associates………………………………..115

III. Domestically incorporated IIFS which have overseas branches and/or banking

subsidiaries……………………………………………………………………………..115

CHAPTER 8: GUIDANCE ON COMPILATION AND DISSEMINATION

………..............117

8.1 SUMMARY

GUIDANCE……………………………………………………………..117

Definition……………………………………………………………………………………117
Sources of data and issues for national compilers…………………………………….118
Type of applicable aggregation and consolidation…………………………………….118

8.2 SOME ISSUES OF PIFS COMPILATION AND DISSEMINATION AS WELL AS

TRANSMISSION TO THE IFSB…………………………………………………………118

PIFD accessibility: public domain vs. restricted domain……………………………… 118
Dimensions of legal backing for statistical compilation……………………………….. 119
Reporting currency…………………………………………………………………………120
Breaks in series…………………………………………………………………………….120
I.Changes in relation to data compilers………………………………………………….120
II.Changes in relation to data suppliers………………………………………………….121
III. Adjustments in the calculation of PSIFIs……………………………………………..121
Resource requirements, PIFS quality and reliability……………………………………121
I.Resource requirements…………………………………………………………………..121
II.Assessment of statistical quality and reliability………………………………………..122

APPENDIX 1 : SURVEY ON THE USE, COMPILATION AND DISSEMINATION OF

ISLAMIC FINANCIAL STATISTICS………………………………………………....124

APPENDIX 2 : SUMMARY OF GUIDANCE………………..……………………………….130

BIBLIOGRAPHY ……………………………………………………………………………….157

viii

GLOSSARY OF TERMS

The development of the Islamic financial services industry has been accompanied by a
proliferation of terms derived from SharÊ’ah rules and principles as well as from Islamic
finance practices.

‘Adl

Justice; a morally upright witness

Ahkam

Plural of hukm (rule)

‘Amal

Conduct

Amaanah

Trust; bailment

‘Aamm

General

‘Aqaid

Belief; tenets of faith

Awqaf

Plural of waqf. For meaning, see below.

‘Aql

Reason. The fourth interest secured by the SharÊ’ah and recognised
as the purpose of law.

Asl

Origin; root; foundation. Source of law.

Baatil

Nullity; void

Bay’

A comprehensive term that applies to sale.

Dalil

Evidence

Diin

Religion

Duyun

Debts

Fasid

Vitiated; irregular

Fadl

Excess. The term is used for usury in the case of Riba Al Fadl.

Faqih

Jurist

Fardh

Obligatory

Fatawa

A SharÊ’ah ruling or a scholarly opinion on a matter of Islamic laws.
A recognised religious authority in Islam issues a fatawa. However,
since there is no hierarchical priesthood or anything of that form in
Islam, a fatawa is not necessarily “binding” on the faithful. The
people who pronounce these rulings are supposed to be
knowledgeable, and base their rulings in knowledge and wisdom.
They need to supply evidence from Islamic sources for their
opinions, and it is not uncommon for scholars to come to different
conclusions regarding the same issue.

Fiqh

Knowledge of SharÊ’ah; that is, law. Refers to the whole corpus of
Islamic jurisprudence. In contrast with conventional law, fiqh covers
all aspects of life, be it religious, political, social, commercial or
economic. The whole corpus of fiqh is based primarily on
interpretations of the Qur’an and the Sunnah and secondarily on
ijma’ (consensus) and ijtihad (individual judgement). While the
Qur’an and the Sunnah are immutable, fiqhi pronouncements may
change due to changing circumstances

Fuqaha

Plural of faqih

Gharar

Literally, it means deception, danger, risk and uncertainty.
Technically, it means exposing oneself to excessive risks and
danger in a business transaction as a result of uncertainty about
the price, the quality and the quantity of the counter-value, the date
of delivery, the ability of either the buyer or the seller to fulfil his or
her commitment, or ambiguity of the terms of the deal; thereby,
exposing either of the two parties to unnecessary risks.

Hadith

Saying; the written record of the Sunnah

Hajat

Needs or necessities

Hakim

The Lawgiver

Haraam

Prohibited

Hawl

One year. The prescribed period after which payment of zakah is
due.

Hibah

Gift

Hukm

Rule, injunction or prescription

Ijārah

Hire, rent or leasing. Sale of the usufruct of an asset. The lessor
retains the ownership of the asset, together with all the rights and
the responsibilities that go with ownership.
An ijārah contract refers to an agreement made by IIFS to lease to
a customer an asset specified by the customer for an agreed period
against specified instalments of lease rental. An ijārah contract
commences with a promise to lease that is binding on the part of
the potential lessee prior to entering the ijārah contract

Ijārah Muntahia
Bittamleek

An ijārah muntahia bittamleek (or ijārah wal iqtina) is a form of
lease contract that offers the lessee an option to own the asset at
the end of the lease period either by purchase of the asset (IjÉrah
thumma al-bay) through a token consideration or payment of the
market value, or by means of a gift contract.

Ijma ‘

Consensus of opinion

Ijtihaad

The effort of the jurist to derive the law on an issue by expending all
the available means of interpretation at his disposal and by taking
into account all the legal proofs related to the issue.

Imam

Leader

Investment
Accounts
(Unrestricted)

The account holders authorise the IIFS to invest their funds based
on MuÌārabah or Wakālah (agency) contracts without laying any
restriction. The IIFS can commingle these funds with their own
funds and invest them in a pooled portfolio.

Investment
Accounts
(Restricted)

The account holders authorise the IIFS to invest their funds based
on MuÌārabah or agency contracts with certain restrictions as to
where, how and for what purpose these funds are to be invested.

Investment Risk
Reserve

Investment risk reserve is the amount appropriated by the IIFS out
of the income distributed to IAH, after allocating the MuÌārib’s
share, in order to cushion against future investment losses for IAH.

Istisnā`

An Istisnā` contract refers to an agreement to sell to a customer a
non-existent asset, which is to be manufactured or built according
to the buyer’s specifications and is to be delivered on a specified
future date at a predetermined selling price.
Refers to a contract whereby a manufacturer (or contractor) agrees
to produce (or construct) and deliver, at a given price on a given
date in the future, a well-described good (or building) according to
specifications. As against Salam, in Istisna` the price need not be
paid in advance. It may be paid in instalments, similar to progress
payment as agreed by the parties, or partly up front, with the
balance being paid later.

Istisnā - Parallel

A second Istisnā` contract where a third party will be manufacturing
for the IIFS a specified kind of asset, which corresponds to the
specification of the first Istisnā` contract.

Khiyaar

Option

Maal

Wealth

Makruh

Reprehensible; abominable; disapproved

Mandub

Recommended

Maslaha

The principle that the SharÊ’ah has determined goals or purposes,
and that the securing of these purposes is an acknowledged
interest.

MuÌārabah

A contract of partnership between capital and work – that is,
between two parties – namely, one or more capital owners or
financiers (called the Rabb al-mal) and an entrepreneur or
investment manager (called the MuÌārib). Profit is distributed
between the two parties in accordance with a pre-determined ratio,
agreed at the time of the contract. Financial loss is borne only by
the financiers. The entrepreneur’s loss lies in not getting any
reward for his or her services.

Murābahah

A Murābahah contract refers to a sale contract whereby the IIFS
sell to a customer, at an agreed profit margin plus cost (selling
price), a specified kind of asset that is already in their possession.

Sale at cost plus mark-up price. The term, however, is now used to
refer to a sale agreement whereby the seller purchases the goods
desired by the buyer and sells them at an agreed marked-up price
(Murabahah to the Purchase Orderer). The payment is settled
within an agreed time frame, either in instalments or in a lump sum.
The seller bears the risks associated with the goods in possession
until they are delivered to the buyer.

Murābahah

for

the Purchase
Orderer (MPO)

An MPO contract refers to a sale contract whereby the IIFS sell to a
customer, at cost plus an agreed profit margin (selling price), a
specified kind of asset that has been purchased and acquired by
the IIFS based on a promise to purchase from the customer, which
can be binding or non-binding.

Mushārakah

A contract between the IIFS and a customer to contribute capital to
an enterprise, whether existing or new, or to ownership of a real
estate or moveable asset, either on a temporary or permanent
basis. Profits generated by that enterprise or real estate/asset are
shared in accordance with the terms of the Mushārakah
agreement, while losses are shared in proportion to each partner’s
share of capital.

Mushārakah -
Diminishing

A form of partnership in which one partner promises to buy the
equity share of the other partner gradually until the title to the equity
is completely transferred to the buying partner. The transaction
starts with the formation of a partnership, after which buying and
selling of the other partner’s equity take place at market value or
the price agreed upon at the time of entering into the contract. The
“buying and selling” is independent of the partnership contract and
should not be stipulated in the partnership contract, since the
buying partner is only allowed to give a promise to buy. It is also
not permitted that one contract be entered into as a condition for
concluding the other.

Profit
Equalisation
Reserve

The amount appropriated by the IIFS out of the MuÌārabah income,
before allocating the MuÌārib’s share, in order to maintain a certain
level of return on investment for IAH and to increase owners’
equity.

QarÌ

A non-interest-bearing loan intended to allow the borrower to use
the loaned funds for a period with the understanding that the same
amount of the loaned funds would be repaid at the end of the
period.

QarÌ or QarÌ Al-
Hasan

Financing extended without interest or any other compensation
from the borrower. The lender expects a reward only from God.

Riba

Literally, increase or addition or growth. Technically, it refers to the
“premium” that must be paid by the borrower to the lender along
with the principal amount as a condition for the loan or an extension
in its maturity. Interest as commonly known today is regarded by a
predominant majority of Fuqaha’ to be equivalent to Riba.

Sadaqah

An act of charity

Salam

A Salam contract refers to an agreement to purchase, at a pre-
determined price, a specified kind of commodity not available with
the seller, which is to be delivered on a specified future date in a
specified quantity and quality. The IIFS as the buyers make full
payment of the purchase price upon execution of a Salam contract.
The commodity may or may not be traded over the counter or on
an exchange.

Salam - Parallel

A parallel Salam contract refers to a second Salam contract with a
third party acquiring, from the IIFS, a specified kind of commodity,
which corresponds to the commodity specified in the first Salam
contract.

SharÊ’ah

Refers to the corpus of Islamic law based on Divine guidance as
given by the Qur’an and the Sunnah, which embodies all aspects of
the Islamic faith, including beliefs and practices.

SukËk

SukËk (certificates) represents the holder’s proportionate ownership
in an undivided part of an underlying asset where the holder
assumes all rights and obligations to such asset.

Takaful

An equivalent to the contemporary insurance contract whereby a
group of persons agree to share a certain risk (for example,
damage by fire) by collecting a specified sum from each. In case of
loss to any one of the group, the loss is met from the collected
funds.

xii

WadÊÑah

An amount deposited whereby the depositor is guaranteed his or
her fund in full.

WakÉlah

An agency contract, where the investment account holder
(principal) appoints the IIFS (agent) to carry out on behalf of the
principal the investment for a fee or for no fee, as the case may be.

Waqf

Appropriation or tying up a property in perpetuity for specific
purposes. No property rights can be exercised over the corpus.
Only the usufruct is applied towards the objectives (usually
charitable) of the Waqf.

Zakah

The amount payable by a Muslim on his or her net worth as part of
his or her religious obligations, mainly for the benefit of the poor
and the needy. Paying zakah is an obligatory duty for every adult
Muslim whose wealth exceeds a certain threshold.

xiii

LIST OF ABBREVIATIONS AND ACRONYMS

AAOIFI

Accounting and Auditing Organization for Islamic Financial Institutions

ADB

Asian Development Bank

ARCIFI

Arbitration and Reconciliation Centre for Islamic Financial Institutions

BCBS

Basel Committee on Banking Supervision

BIS

Bank for International Settlements

BPM5

Balance of Payments Manual (5th Edition)

CAS

Capital Adequacy Standard (IFSB)

CIBAFI

General Council for Islamic Banks and Financial Institutions

CIS

Collective investment schemes

CRWA

Credit risk-weighted assets

DCR

Displaced commercial risk

DQAF

Data Quality Assessment Framework

ECB

European Central Bank

ECAIs

External Credit Assessment Institutions

ESA 95

European System of National and Regional Accounts

FSIs

Financial soundness indicators

GDDS

General data dissemination system

IAH

Investment

Account

Holders

IDB

Islamic Development Bank

IFRS

International Financial Reporting Standards

IFSB

Islamic Financial Services Board

IFSI

Islamic financial services industry

IIFS

Institutions offering Islamic financial services

IMF

International Monetary Fund

xiv

IRR

Investment risk reserve

ISIC

International Standard Industrial Classification of All Economic Activities

M&A

Merger and acquisition

MFSM

Monetary and Financial Statistics Manual

MRWA

Market risk-weighted assets

NAV

Net asset value

NPF

Non-performing financing

OCVA

Other changes in the volume of assets.

OECD

Organization for Economic Cooperation and Development

ORWA

Operational risk-weighted assets

PER

Profit equalisation reserve

PIFD

Prudential Islamic Finance Database

PIFIs

Prudential Islamic Finance Indicators

PIFS

Prudential Islamic Finance Statistics

Profit-sharing

PSIA

Profit-sharing investment account

PSIFIs

Prudential and Structural Islamic Finance Indicators

ROA

Return on assets

ROE

Return on equity

Risk

weighted

RWA

Risk weighted assets

SDDS

Special Data Dissemination Standard

SIFIs

Structural Islamic Finance Indicators

SMEs

Small and medium enterprises

SNA 1993

System of National Accounts of the United Nations 1993

Technical

Assistance

Bismillahirrahmanirrahim

Allahumma salli wasallim ‘ala Sayyidina Muhammad wa’ala ālihi wasahbihi

CHAPTER 1: INTRODUCTION

1.1 BACKGROUND

The limited availability of statistical information on the Islamic financial services

industry (IFSI) worldwide has hindered accurate and comprehensive analysis and
assessment of developments in the industry. More specifically, lack of cross-country
historical data with sufficiently long time-series has been identified as one of the major
challenges faced by the Islamic Financial Services Board (IFSB) in developing its
international prudential standards.

2.

In light of this, the IFSB Council, in its fifth meeting held on 22 December 2004 in

Jeddah, Saudi Arabia, passed a resolution mandating the IFSB Secretariat to undertake
an initiative towards establishing a global prudential database of Islamic financial services
statistics. This mandate is in line with Article 4(h) of the IFSB’s Articles of Agreement,
which states that one of the IFSB’s objectives is “to establish a database of Islamic banks,
financial institutions and industry experts”.

3.

As a first step towards designing a database that provides reliable and

comprehensive statistical information on the IFSI globally, the IFSB has initiated an
exercise to encourage countries to compile and disseminate relevant data based on
commonly agreed frameworks, drawing on existing national practices.

4.

For that purpose, the IFSB secured from the Islamic Development Bank (IDB) and

the Asian Development Bank (ADB), a Technical Assistance (TA) grant to help finance,
among others, the efforts to establish such a database. An initial study report prepared
recommended that the IFSB Secretariat set up a taskforce comprising IFSB members to
advise on, and provide assistance in, establishing the Prudential Islamic Finance
Database (PIFD).

5.

Based on the recommendations outlined in the initial study report and subsequent

discussions, the Database Taskforce agreed:

to develop a framework for the compilation of Islamic finance indicators,

which was subsequently referred to as the “Compilation Guide on Prudential and
Structural Islamic Finance Indicators”, or the “Compilation Guide”;
b)

to focus on banking and near-banking institutions offering Islamic financial

services (IIFS); and
c)

to conduct a survey among IFSB member countries (through their

respective central banks/monetary authorities) to assist the Taskforce in drafting
the Compilation Guide by gathering information on their current compilation and
dissemination practices and their views on the usefulness and relevance of various
Prudential Islamic Finance Statistics (PIFS), which comprise the Prudential and
Structural Islamic Finance Indictors (PSIFIs) and their underlying data series. A
summary of the Survey on the Use, Compilation and Dissemination of Islamic
Financial Statistics is attached as Appendix 1.

The Compilation Guide is the main deliverable of the current phase of the project,

and will provide the foundation of the PIFD, setting the stage for the next phase dealing
with actual compilation.

1.2

OBJECTIVES OF THE PIFD

The underlying purposes of the PIFD are to facilitate macroprudential analysis

and to help assess the structure and state of development of the IFSI. While
macroprudential analysis deals with the macroeconomic and institutional determinants of
the soundness of the financial system, the analysis of the structure and development of
the IFSI should help gauge its contribution to economic growth and the overall
development of the financial sector. With these two purposes in mind, the Taskforce
reached a consensus on the five principal objectives of the PIFD:

a) to facilitate the monitoring and analysis of the soundness and stability of the

IFSI through a set of prudential, structural and financial strength indicators, as
well as by fostering cooperation among central banks/monetary authorities and
other relevant supervisory authorities;

b) to support and help coordinate the formulation, development and enhancement

of appropriate international prudential standards by the IFSB;

c) to help promote the development of the IFSI as a vehicle for stimulating

economic development and reducing disparities in economic progress between
nations;

d) to help strengthen transparency and international comparability of domestic

IFSIs in order to facilitate their integration into the international financial system
through public accessibility to the PIFD and other published cross-country
industry data in IFSB research reports; and

e) to help ascertain the market shares of SharÊ’ah compliant financial transactions,

products and services as a percentage of the entire financial system, at both
the national and global levels, so as to gauge the performance of the IFSI at
any given time.

To meet these objectives, the Taskforce first identified core and encouraged

indicators before proceeding to draft a compilation framework. In fact, these objectives
form the basis for the selection and development of core and encouraged indicators,
which are derived from the identified set of core and encouraged underlying data.

9.

Core indicators should be analytically significant, relevant in most circumstances

(i.e. not country-specific), generally available and of high perceived usefulness.
Encouraged indicators are also relevant for financial stability assessment, but their
importance may vary from one country to another.

10.

PSIFIs consist of core and encouraged Prudential Islamic Finance Indicators

(PIFIs) and Structural Islamic Finance Indicators (SIFIs). PSIFIs and their underlying
data, together referred to as Prudential Islamic Finance Statistics, form a new body of
macrostatistics developed from the prudential, regulatory and commercial perspectives
as well as the macroeconomic measurement frameworks, and which are derived from
aggregated individual institutions’ data and data on markets for Islamic financial
instruments.

1.3

OBJECTIVES OF THE COMPILATION GUIDE ON PSIFIs

11. The Compilation Guide on PSIFIs attempts to:

a) standardise the adoption of conceptual frameworks and relevant measurement
principles that support the reporting structure and system, for the purpose of
promoting international data comparability; that is, to provide uniform guidance to
national data compilers in particular on concepts, definitions, techniques and any
other aspects related to the compilation and dissemination practice, so as to
develop an internationally comparable set of indicators; and
b) encourage the compilation and dissemination, at the national level, of core and
encouraged indicators, expressed in percentage or ratio terms, as well as to
facilitate the eventual transmission of these internationally comparable indicators
(together with their underlying data series) to the IFSB.

12.

The Compilation Guide draws upon compilation and dissemination efforts at the

national level, and is intended to be a comprehensive document in explaining how to
compile core and encouraged indicators, as well as detailed information on their
underlying data, to assist data suppliers and data compilers as well as the PIFS users.
The Compilation Guide also aims to be a benchmark, or a document of reference, for
future work on the compilation and dissemination of other categories of PIFS.

13.

The Compilation Guide intends to serve as a supplement to the International

Monetary Fund’s (IMF’s) Financial Soundness Indicators (FSIs). The idea is for the
PSIFIs to be consistent with the IMF’s FSIs, but adapted appropriately to cater for the
specificities of IIFS and enhanced by some structural indicators. Moreover, for the
purpose of financial soundness analysis, the underlying data of PSIFIs are required to
be compiled on a domestically controlled, cross-border basis, a concept consistent with
the recommendations specified for the IMF’s FSIs and similar to the method used by the
Bank for International Settlements (BIS) to consolidate international banking statistics.

1.4

PIFS AND OTHER EXISTING MACROECONOMIC STATISTICAL SYSTEMS

14.

The PIFS, which comprise the PSIFIs and their underlying data series, constitute

a new set of macroeconomic statistics, or macrostatistics. Other macrostatistics may
include statistics drawn from national accounts; balance of payments systems;
government finance; monetary and financial statistics, among others. In general, the
underlying purpose of the PIFS is to provide data on homogenous categories and to
maximise the benefits of internationally comparable statistics.

15.

To minimise the statistical burden on national data compilers (as well as data

suppliers), the Compilation Guide recommends using the existing statistical systems,
especially in their reporting to other international organisations such as the BIS and the
IMF. For the PIFS to be reasonably coherent and integrated with existing
macrostatistical systems, their concepts, definitions, classifications, and accounting
principles and frameworks shall be relatively consistent with each other. Consistency
between different systems will enhance the analytical usefulness of all the
macrostatistics involved, by providing more useful and relevant information for
macroprudential analysis.

16.

The Compilation Guide gives special attention to the harmonisation of PIFS with

other related statistical systems, to the fullest extent possible, and especially with the
System of National Accounts of the United Nations 1993 (SNA 1993), which serves as a
coordinating framework from both conceptual and accounting perspectives for all
macrostatistics.

17.

In principle, micro-data sets can be compiled at any level of aggregation, even at

an individual institutional unit. As such, it would appear that macrostatistics for sectors or
the whole economy could be obtained directly by aggregating corresponding data for
individual units. However, in practice, macrostatistics may not be built up by simply
aggregating the relevant micro-data, since accounting conventions and valuation
methods at a micro level typically differ from those required at a macro level, or the
concepts deemed appropriate at a micro level may prove to be unsuitable at a macro
level.

1.5

SOURCES OF UNDERLYING DATA FOR PSIFIs

18.

Underlying statistical information for any financial and structural indicators can be

derived from a variety of sources, such as administrative (e.g. value-added-tax returns
and merchandise trade statistics) and business (bookkeeping, financial statements and
reports, and other accounting resources) records; specially conducted surveys and
censuses (e.g. household surveys and industrial inquiries), as well as memorandum
series to financial statements (e.g. supervisory-based series, series for a further analysis
of the balance sheet and other balance sheet-related series). Of the financial statements
and reports commonly used by businesses – the income and expense statement, the
statement of capital, the balance sheet and the cash-flow statement – the most
important

are the balance sheet and the income and expense statement. Although

memorandum items are required only in certain countries, they could prove to be useful
for more detailed analysis and for cross-country comparison.

19.

To arrive at PIFIs and SIFIs, the national compilation will have to rely on two

main sources of information – namely, commercial accounting and prudential or
supervisory data, such as the income and expense statement, the balance sheet and
accompanying memorandum series to monitor individual entities, as well as national
accounts-based data to monitor the relevant aggregate economic activities.

20. However, data derived from commercial and prudential measurement
frameworks may vary across jurisdictions, which could limit the objective of enhancing
cross-country data comparability. It is the intention of the Compilation Guide to specify
some common measurement principles and frameworks that would enhance
international data comparability.

CHAPTER 2: OVERVIEW OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY

21.

A financial system plays a central role in the efficient functioning of an economy

by providing a range of financial services that facilitate payments, mobilise savings,
reallocate resources among alternative uses, and help to monitor, transform and
manage risks. It principally serves as a medium for mobilising funds from savings-
surplus financial and non-financial economic units

and canalisation of these funds to

savings-deficit financial and non-financial economic units. This intermediation process
typically involves financial institutions and markets executing payments, clearing and
settlements; asset mobilisation and management; and risk monitoring, control and
transfer.

22.

The structure of a financial system is characterised by the interaction between

the users of financial services, the intermediaries that offer financial services, and the
markets, including the supporting operational infrastructure, within which intermediaries
operate, users obtain financial services and financial instruments are traded.

23.

The IFSI is a component of the broader financial system comprising instruments,

infrastructure, institutions and markets that apply SharÊ’ah rules and principles in their
design and operations. Institutions offering Islamic financial services may include banks,
Takaful operators, capital market intermediaries and other market players. The
underlying intentions of these SharÊ’ah rules and principles are: to eliminate riba, or
usury – that is, interest in all forms and intents; to avoid preventable uncertainty or
ambiguity in transactions; to impede exploitation; and to establish a just society. To
ensure compliance with SharÊ’ah rules and principles, IIFS rely on an external or in-house
SharÊ’ah committee or board comprising SharÊ’ah scholars who will carry out advisory and
consultative functions.

24.

As such, Islamic finance, in contrast to conventional finance, involves the

provision of financial products and services by IIFS, for SharÊ’ah approved underlying
activities, based on contracts that comply with SharÊ’ah rules and principles. These
activities, rules and principles are based on precepts such as profit-and-loss-sharing,
profit-sharing-and-loss-bearing, avoidance of interest and uncertainty, and reliance on
various asset-backed (such as lease-based and sales-based) transactions, as well as
various social, moral and ethical considerations.

25.

The Islamic financial system can perform all of the functions associated with

finance and therefore has sub-sectors that are similar to the conventional system. These
sub-sectors consist of, among others, the Islamic banking industry, the Islamic money
market, Islamic capital markets (equity and bond markets), the Takaful (Islamic
insurance) industry and the Islamic asset/wealth management industry.

26.

The modern forms of Islamic finance practices can be traced back to 1962 when

the Malaysian Government established “Tabung Haji”, a pilgrimage fund board.
However, the Dubai Islamic Bank made history in 1975 as the first commercial bank
licensed to offer financial services and products in accordance with SharÊ’ah rules and

Institutional economic units are fundamental economic units or transactors, in their own right and on their

own behalf, capable of owning goods and assets, incurring liabilities, and engaging in a full range of
economic activities and transactions with other units. For a further discussion, please refer to Chapter 7,
Section 7.1.

principles. Since then, the IFSI has thrived worldwide, in particular in the Gulf
Cooperation Council (GCC) region, South-East Asia and South Asia. At present, the
following types of IFSI structure can be distinguished worldwide:

a) Dual system: the co-existence of conventional and Islamic financial services,
with the latter provided by both full-fledged IIFS and “Islamic window” operations at
conventional financial institutions – e.g. in Malaysia and Indonesia.
b) Dual system with clear separation between the conventional system and the
Islamic system: non-existence of “Islamic windows”, since only full-fledged IIFS are
allowed to offer SharÊ’ah compliant products and services in a country – e.g. in
Bahrain and Jordan.
c) Full Islamisation of the financial system: virtual absence of conventional financial
institutions, since only full-fledged IIFS are licensed to operate in a country – e.g. in
Iran and, until recently, Sudan.

27.

In a dual-system environment, it is not uncommon to see big global banks such

as HSBC, Citibank, Standard Chartered, Deutsche Bank, BNP Paribas and ABN Amro
setting up Islamic window operations or even Islamic banking subsidiaries. In recent
years, the IFSI has seen the following trends emerge in a number of countries:

a) establishment of “greenfield” Islamic banking subsidiaries, in part through
mergers and acquisitions (M&As) of existing financial institutions;
b) conversion of “Islamic windows” at conventional banks into full-fledged Islamic
banking subsidiaries (“subsidiarisation” process); and
c) gradual opening up of domestic IFSIs with the entry of new foreign players, as
well as strategic partnerships between local and foreign IIFS (“open-door” policy).

28.

Recent developments in the IFSI mark a turning point for the industry as it moves

towards greater integration with the broader financial system, domestically, regionally
and internationally. Indeed, in order to effectively tap the growing demand worldwide for
SharÊ’ah compliant financial servies, several countries are implementing policies aimed at
developing their financial centres into international – or at least regional – hubs for
Islamic finance. Given that Muslims number around 1.5 billion worldwide, or about 25%
of the world’s population, and yet the assets of IIFS account for only 1% of global
banking assets, there is significant growth potential for Islamic finance. Please refer to
the Ten-Year Framework for the Development of the IFSI for further discussion.

As part of the implementation of the Comprehensive Peace Agreement, a dual banking system is now in

operation in Sudan – i.e. an Islamic banking system in Northern Sudan and a conventional banking system
in Southern Sudan.

2.1

COMPOSITION OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY

29.

The IFSI can be analysed from the perspective of four main groups of products

and services offered by market players or IIFS, plus one structural segment:

a) Islamic banking and near-banking services;
b) Islamic non-banking services (other than insurance and capital market);
c) Islamic insurance services, or Takaful;
d) Islamic capital market services; and
e) Islamic financial architecture and infrastructure.

Islamic banking and near-banking services

30.

Islamic banking services primarily involve receiving funds by way of deposits or

any other close substitutes, such as issuance of short-term certificates of deposit and
investment accounts to mobilise financial resources, and redirection of these funds
towards productive use in various economic activities, using funding and financing
instruments that are in accordance with SharÊ’ah rules and principles. These collected
funds, which are included in the broad measure of money supply, are similar in varying
degrees to conventional demand and time deposits but are based on different
contractual structures to ensure compliance with SharÊ’ah rules and principles.

31.

More specifically, Islamic banking shall include financial institutions that engage

in SharÊ’ah compliant financial intermediation as their principal activity, and have the
following items as sources and applications of funds as reflected in the balance sheet:

a) Funding sources: Funding sources for banking IIFS may include profit-sharing
investment accounts (PSIAs) governed by MuÌÉrabah or WakÉlah contracts and/or
liabilities in the form of non-PSIA SharÊ’ah compliant demand deposits (savings and
current accounts) governed by Wadi’ah, QarÌ or WakÉlah contracts and/or any other
close substitutes for deposits in the form of financial instruments to mobilise financial
resources that may not be readily transferable and/or equities (share capital,
shareholders’ funds, etc.) and/or sukËk and other asset-backed SharÊ’ah compliant
securities issued by IIFS. SharÊ’ah compliant savings and current accounts, which
are withdrawable on demand and/or transferable by cheques and other payment
instruments, are liabilities of IIFS, similar to demand deposits of conventional banks.
In contrast, PSIA are held for a fixed term while PSIA holders share in the profits and
bear the losses on assets of IIFS. As such, PSIAs combine the features of
conventional time deposits as well as equity claims on IIFS.
b) Financing assets: Financing assets for banking IIFS may include asset-backed
and sales-based financing (Murabahah, Bay’ Bithaman Ajil, Bay al-Inah, Salam,
IstisnÉ´, etc.); asset-backed leasing (IjÉrah, Al IjÉrah Muntahia Bittamleek, etc.);
profit-sharing or equity-type financing (MuÌÉrabah and MushÉrakah); and zero-return
benevolent financing (QarÌ).
c) Investment assets: Investments of banking IIFS could be in the form of real/non-
financial or financial assets. Financial assets may comprise equity-type assets
(including equity holdings or shares held in companies that meet specified SharÊ’ah

A large part of this section is adapted from the Ten-Year Framework for the Development of the IFSI.

requirements) and undivided share of ownership rights or beneficial rights on cash-
flow-generating assets (sukËk based on various SharÊ’ah compliant contracts such as
IjÉrah , IstisnÉ´, MushÉrakah, etc.). Such investment assets (on balance sheets) are
generally tradable, and hence are exposed to market risks.

32.

Unlike conventional banks, banking IIFS undertake risk-sharing activities with

some of their fund providers and/or depositors. Subject to the nature and purpose of
funding, the balance sheet of an Islamic bank may show that there is no clear distinction
between the “banking book” and “trading book” activities, since its sources of funds
reflect activities usually conducted by a commercial bank and investment bank/asset
management combined. As such, business activities of an Islamic bank are more akin to
the universal banking concept.

33.

The PSIA, the largest funding source for an Islamic bank, is its most unique

feature, characterised by the participatory nature in risks and returns. PSIA holders or
Investment Account Holders (IAH) can be grouped into two categories – namely, general
or unrestricted IAH, and specific or restricted IAH. As a mechanism of protection for IAH,
it has become a common practice for banking IIFS in a number of jurisdictions to set
aside voluntary and prudential reserves as “internal buffers” built up from past returns in
the form of a profit equalisation reserve (PER)

and/or an investment risk reserve (IRR).

34.

Currently enjoying a strong presence in the Middle East, South-East Asia, South

Asia and Northern Africa, Islamic banking, which is the most mature and the largest
segment of the IFSI, has begun to make inroads into Europe and North America.

Non-banking financial services (other than insurance and capital market)

35.

Non-banking financial intermediaries refers to financial institutions that are

involved in financial intermediation, but not in deposit-taking and/or financing activities
per se; hence, they are not classified as banking or near-banking financial institutions.
Non-banking financial services (other than insurance and the capital market) are
provided to cater to the different risk, return, maturity and liquidity requirements of
economic units, while complementing the activities of banking financial institutions. For
instance, they typically provide specialised financial services such as leasing, which
allows customers to lease and use equipment or any movable assets owned by financial
institutions without having to purchase them, in return for regular lease payments over a
specific lease period, and factoring, which allows customers to pledge their future
income such as account receivables to financial institutions in exchange for working
capital.

PER is appropriated out of the gross income to smooth returns payable to IAH across economic and

business cycles. The underlying intention is to prevent a fall in their returns – i.e. to mitigate the risk of low
returns on investment. Please refer to the IFSB Capital Adequacy Standard (CAS), December 2005, for
further discussion.

IRR is appropriated out of the income to IAH after deduction of the IIFS’ share of income to absorb

potential losses on investments financed by PSIA funds before they can have an impact on the capital of
IAH – i.e. to mitigate the risk of loss on investment. Please refer to the IFSB CAS, December 2005, for
further discussion.

36.

Quite a number of these non-banking financial institutions are subsidiaries of

banking and near-banking groups, but they are constituted separately for reasons of
legal convenience or in response to regulatory requirements. Funding of these
institutions typically emanates from the parent banking and near-banking IIFS. For
example, a subsidiary of Malaysian Industrial Development Finance Berhad (which is
essentially a microfinance institution and an investment bank) provides leasing and
factoring services based on IjÉrah and Bay’ Bithaman Ajil principles to small and
medium enterprises (SMEs) in Malaysia.

37.

However, some of these non-banking financial institutions, such as pilgrimage

boards (managing funds collected for the purpose of performing the hajj), as well as
institutions managing awqaf (trust), inheritance, zakah (tithe or obligatory charities) and
sadaqah (alms or voluntary charities) funds, are unique in Islamic finance and have no
equivalent in conventional finance.

Islamic insurance services, or Takaful

38.

Islamic insurance, or Takaful, which means “guaranteeing each other” or “mutual

guarantee” or “solidarity”, is based on the concept of mutual cooperation between
members or Takaful holders/participants who contribute a certain amount of money in
the form of a tabarru’ (donation) to a common pool, which will be used to provide
indemnification against losses arising from specified categories of risks.

39. A

Takaful operator may choose between mutual/cooperative and commercial

models for its organisational structure. Nonetheless, a typical Takaful undertaking
usually consists of a two-tier structure – that is, a hybrid of a mutual/cooperative and a
commercial type of company, which is similar to the conventional mutual insurance.
However, the structure of a Takaful operator differs from its conventional mutual insurer
counterpart in the sense that Takaful undertakings are initiated and managed by the
Takaful operator whose shareholders are distinct from its Takaful holders.

Mandated to

manage Takaful holders’ funds in the best interest of Takaful holders and to act as a
custodian of these funds, a Takaful operator does not bear any underwriting risk. Takaful
holders’ funds and shareholders’ funds need to be segregated.

40. Similar

to their conventional counterparts, Takaful services exist in two forms: life

(or “family”) and non-life (or general). Takaful holders will pay an agreed-upon premium
amount to a common fund (managed by Takaful operators), which will be used mutually
to protect themselves against defined losses or damages. Underlying SharÊ’ah principles
used to design Takaful contracts vary across jurisdictions, although four models –
namely, WakÉlah (agency), MuÌÉrabah (profit-sharing), Kafalah (suretyship) and Waqf
(endowment) – are the most prevalent. It is quite common for Takaful operators to
combine at least two of the four mentioned SharÊ’ah principles in their Takaful contract
design. For example, to govern the relationship between Takaful holders and Takaful
operators, the WakÉlah principle is used for the underwriting contract, while the
MuÌÉrabah principle is adopted to govern investment activities of Takaful holders’ funds.

A large part of this subsection is adapted from the Issues in Regulation and Supervision of Takaful (Islamic

Insurance) (August 2006) and the Issues Paper for the Governance of Takaful Operations Working Group (7
September 2006).

The Sudanese Takaful model is slightly different, however, as every Takaful holder is also a shareholder of

the Takaful operator.

41.

The concept of contribution of funds to a common pool by a group of people to

assist other members in the group in need has long been in practice and encouraged
under the custom of “al-aqilah” and mutual goodwill, which resembles the concept of risk
mitigation by the law of large numbers in modern insurance. Many SharÊ’ah scholars also
consider “diyah” and “zakah” as early precursors of Islamic insurance.

42.

The establishment of Sudan’s Islamic Insurance Company in 1978, which is

based on a cooperative model, marks the first Islamic insurance to be introduced in
modern times. Subsequently, more commercial Takaful operators based on the
commercial model were set up in countries such as Malaysia and Saudi Arabia. At
present, there are more than 100 Takaful and re-Takaful operators in more than 20
countries worldwide, concentrated mostly in Malaysia, Sudan and Bahrain.
`
43.

Having started originally in Malaysia, re-Takaful, the equivalent of conventional

re-insurance, has been aggressively developed in many countries in recent years. Re-
Takaful can be defined as “protection or insurance for Takaful operators”, whereby a
Takaful operator pays a portion of its Takaful fund to a re-Takaful operator, who will, in
return, provide security or re-Takaful protection for a specific risk or a broad class of
business.

44.

The development of Takaful, especially its life/family form, could provide a means

for Islamic fund managers to significantly boost assets under management, as well as
the number of investors in a fund. Developing and putting into practice the concept of
“banctakaful”, similar to the conventional “bancassurance”, should also help promote
further Takaful services and widen their spread, domestically and, eventually, globally.

Islamic capital market services

45.

Islamic capital market refers to a segment of the broader capital market and the

related services dealing with SharÊ’ah compliant equity, fixed income and derivatives
instruments. Capital market services include services provided to facilitate the full life
cycle of raising, managing and retiring securities issued in the capital market (equity
and/or bond), which may include arrangements for private placements; management of
public offerings, listings and flotation; preparation of prospectuses and other information
relating to issues; underwriting and subscription of securities; as well as providing a
trading platform to buy and sell securities. Capital market services may also comprise
consultancy, advisory and other auxiliary financial services, including investment and
portfolio research and advice; advice on the application of capital market products such
as securitisations, financial instruments including derivatives, and credit risk pricing and
analysis; advice on M&As, corporate, debt or loan restructuring and strategy; market
analysis and intelligence; and credit assessments/ratings.

46.

Some of the capital market intermediaries may also carry out financing activities

(extension of financing) such as those undertaken by merchant/investment banks and
brokerage houses, or mobilise public savings into investments in financial and non-
financial assets – for example, through asset/wealth management activities undertaken
by fund management companies, mutual funds/unit trusts, investment trust funds and
hedge funds – but their funding is not directly sourced from savers/depositors. In

addition, they may provide sound operational infrastructure, such as custodial
depositary, clearing and settlement services for securities trading.

47.

Islamic capital markets have experienced rapid growth since the late 1990s,

reflecting both a shift in the financial sector policies of some countries, and financial
innovations undertaken by the private sector. The emergence of global and domestic
equity funds and indices (based on SharÊ’ah compliant stocks), and of sukËk or SharÊ’ah
compliant asset-backed securities, is the most prominent aspect of Islamic capital
market development thus far.

Islamic financial architecture and infrastructure

48.

Islamic financial architecture and infrastructure refers to the legal, institutional

and market arrangements required for a sound, efficient and well-functioning IFSI, at the
domestic, regional and/or global levels. This infrastructural segment also serves as a
pre-requisite for effective supervision and sound development of the IFSI and may
include the following aspects:

a) legal infrastructure, especially national, regional and international regulatory and
supervisory organisations (including licensing authorities) with laws governing
contracts, property rights, insolvency and creditors’ rights regime, financial safety
nets, etc.;
b) information, transparency and governance infrastructure, including transparency
and neutrality of monetary and financial policies; corporate and SharÊ’ah governance;
accounting and auditing framework; disclosure regime and market monitoring
arrangements such as external credit assessments/ratings and credit reporting
systems; as well as professional or industry associations; and
c) systemic liquidity infrastructure, including monetary and exchange operations;
trading, clearing, depositary, payment and securities settlement systems; liquidity
support facilities such as “lender of last resort”; and microstructure of money, foreign
exchange and securities markets.

49. Indeed, any domestic IFSI may leverage on the existing infrastructure
arrangements for conventional finance, reducing the need to develop a new
infrastructure, although some adjustments to operational modalities may be needed to
cater for the specificities of Islamic finance.

50.

In addition, several international Islamic financial infrastructure institutions have

been set up in recent years. These institutions collectively facilitate monetary and
financial policy-making at the national level; and promote national development, financial
stability, and national, regional and global integration of the IFSI by developing
internationally recognised standards, guidelines and best practices, by coordinating
national policies, and by organising international financial and technical support.

51.

These international organisations – including standard-setting bodies such as the

IFSB and the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI), associations of market players such as the General Council for Islamic Banks
and Financial Institutions (CIBAFI) (for banking institutions) and IIFM (for capital market
intermediaries), and dispute resolution centres such as the Arbitration and Reconcilation
Centre for Islamic Financial Institutions

(ARCIFI) shall provide broader global guidance

on financial reporting, accounting and auditing, capital adequacy and solvency, risk
management, transparency and disclosure, and corporate governance, among others.

2.2 SCOPE OF COVERAGE AND APPLICATION OF THE COMPILATION GUIDE

Institutional coverage: banking and near-banking IIFS

52.

The Compilation Guide recommends limiting the scope of coverage to banking

and near-banking services

that comply with SharÊ’ah rules and principles – that is, the

emphasis is on the Islamic banking statistics. Hereafter in the Compilation Guide, an
IIFS is defined as a financial institution involved in financial intermediation whose major
activities are to receive funds/deposits or their close substitutes which are included in the
broad measure of money supply and/or to extend financing or invest in securities as
intermediaries or on their own account, in accordance with SharÊ’ah rules and principles.

53.

To illustrate accurately the types of financial institutions covered, the Compilation

Guide prefers using the term “banking and near-banking IIFS” which is consistent, to a
large extent, with “deposit takers” used in the IMF’s FSIs, “other (than central banks)
depositary corporations” in the SNA 1993, “other (than the central bank) depositary
institutions in the IMF’s Monetary and Financial Statistics Manual (MFSM), “banking
institutions” in the BIS’s locational and consolidated international banking statistics, and
“monetary financial institutions (other than central banks)” in the European System of
National and Regional Accounts (ESA 95) and the European Central Bank (ECB).

54.

In many jurisdictions, financial institutions offering banking services or deposit

takers are defined under banking or other similar laws for supervisory and regulatory
purposes. However, the Compilation Guide combines both banking corporations (other
than central banks), as defined in the national banking or other similar laws, and other
financial corporations (other than central banks) that receive funds/deposits and/or
extend financing in a SharÊ’ah compliant manner, into a segment of the IFSI. The
Compilation Guide defines this institutional sector as the “banking and near-banking
IIFS”, a definition that also includes “Islamic windows” as further discussed in Chapter 3,
Section 3.2.

55.

Apart from commercial banks that may qualify as banking IIFS per se, there are a

number of near-banking IIFS whose liabilities are also part of the broad money. These
near-banking IIFS perform some or all of the major activities of banking IIFS, such as
receiving funds/deposits and/or extending financing, but their operations serve to
complement the activities of banking IIFS.

56.

Near-banking or “specialist” IIFS may include IIFS which provide a focused set of

financial services to a broad clientele, such as investment banks, finance companies,

savings banks (such as trustee savings banks and savings and loans associations) and
building societies/mortgage banks, or those specialising in serving a particular segment
of the economy or the population, such as development banks and microfinance

Historic background and the regulatory environment usually play an important role in determining the

institutional organisation as well as the range and types of financial services offered by institutions and
intermediaries in a country.

Finance companies are typically engaged in financial intermediation, but in some jurisdictions they do not

receive deposits or funds from the public.

institutions, as well as formally organised and regulated credit unions/institutions and
cooperatives. Please refer to Chapter 3, Section 3.2 for further discussion.

57. Government-controlled banks such as post office savings banks and rural or
housing banks that meet the definition as specified in paragraph 52 above may also be
considered as near-banking IIFS as long as they are institutional units separate from
the government. In any case,this differences list (as shown in table 2.1)

of banking and

near-banking IIFS is not exhaustive and may change from time to time as needed.

Table 2.1: Mapping between the PSIFIs’ banking and near-banking IIFS and the
FSIs’ deposit takers

Banking and near-banking IIFS (other
than central banks)

Deposit takers (other than central banks)

I. Banking corporations

I. Depositary corporations

1. Commercial banks

II. Other financial corporations

II. Other depositary corporations

1. Investment banks

2. Finance companies

3. Savings banks

4. Building societies/mortgage banks

5. Development banks

6. Microfinance institutions

7. Credit unions or cooperatives

58.

Consistent with the above definition, any other IIFS that play a significant role in

a country’s money creation and monetary policy transmission should also be
considered as reporting institutions. However, the Compilation Guide recommends
excluding from the community of reporting IIFS any IIFS that does not receive deposits
or funds and/or extend financing in a SharÊ’ah compliant manner, or does not operate to
complement banking IIFS although it is under the purview of central banks/monetary
authorities (or any other relevant supervisory authorities) – in particular, if these
financial institutions constitute only a minor fraction of the concerned domestic Islamic
banking system.

Data coverage: types of

SharÊ’ah compliant contracts

59.

In general, there are two major categories of financial intermediation modes in

Islamic finance – namely, profit-sharing (PS) and non-profit-sharing (non-PS). A variety
of SharÊ’ah compliant financial modes in these two categories can be used either on the
funding or financing sides in the balance sheet of an IIFS. Encompassing these two
broad categories, Islamic financial instruments can be further categorised into various
forms, either profit-sharing-and-loss-bearing, profit-and-loss-sharing, asset-backed,
services-based or sukËk (securities).

60.

The PS category comprises profit-sharing instruments, which are usually based

on the:

a) profit-sharing-and-loss-bearing principle (MuÌÉrabah); or
b) profit-and-loss-sharing principle (MushÉrakah ).

61. The non-PS category usually consists of asset-backed, services-based
instruments and benevolent contracts.

62. Islamic asset-backed contracts can be further categorised into three activity-
types of contracts (together with their underlying SharÊ’ah principles):

a) sales-based contracts (Murabahah, Bay’ Muajjal, Bay’ al-Inah, Salam,
etc.);
b) lease-based contracts (IjÉrah, Al IjÉrah Muntahia Bittamleek, etc.); or
c) contracts to produce or manufacture (IstisnÉ´).

In Islamic finance, Wadi’ah and WakÉlah contracts usually govern services-based
facilities and instruments, while QarÌ and Hiba are the most widely used modes for
benevolent contracts worldwide.

63.

The Compilation Guide attempts as much as possible to capture all types of

financial intermediation modes based on SharÊ’ah rules and principles available within
and across countries worldwide. However, Bay’ al-Inah, Bay’Dayn, Tawarruq, Hiba and
Mugawala appear to be the least commonly used among all the 21 SharÊ’ah compliant
contracts listed in Table 2.1.

For the purpose of compilation and dissemination, the Compilation Guide recommends
that SharÊ’ah compliant contracts other than the 16 identified as the most commonly used
worldwide are lumped under the “Others” category. The following table set out the
SharÊ’ah compliant contracts that being used for funding and/or financing activities:

Table 2.2: List of

SharÊ’ah compliant contracts in balance sheet positions and the

possibility of being used for funding/funding-related and/or financing/financing-
related activities

SharÊ’ah compliant contracts

Funding

Financing

Profit-sharing

1. Mudārabah Yes

Yes

2. Mushārakah Yes

Yes

3. Diminishing Mushārakah/Mushārakah Mutanaqisah Yes Yes

Asset-backed: sales-based type

1. Murābahah/Murābahah to the purchase orderer

Yes

2. Bay’ Bithaman Ajil/Bay’ Muajjal No

Yes

3. Salam/Parallel Salam Yes

Yes

4. Bay’ al-Inah No

Yes

5. Bay’Dayn No

Yes

6. Tawarruq No

Yes

Asset-backed: lease-based type

1. IjÉrah

Yes Yes

2. IjÉrah Muntahia Bittamleek

Yes Yes

Ijarah Muntahia Bittamleek includes Ijarah Thumma al-Bay.

Asset-backed: contracts to manufacture/produce

1. Istisnā/Parallel Istisnā Yes

Yes

Benevolent contracts

1. QarÌ

Yes Yes

2. Hiba Yes

Yes

Services-based contracts

1. Wadī’ah Yes

2. Wakālah Yes

3. Kafalah Yes

Yes

4. Rah’nu Yes

Yes

5. Sarf Yes

Yes

6. Hiwalah Yes

Yes

Others

1. Mugawala

Yes

Note:

Table 2.2 lists all SharÊ’ah compliant contracts reported to be in use in the

jurisdictions that participated in the survey of compilation and dissemination practices
and provides an indication of their possible use in financing or financing-related and
funding or funding-related activities. Subject to meeting contractual conditions and
market demands, the specific application of these contracts could vary among
jurisdictions, and evolve with innovation and time.

Mugawala can be a specific type of either Ijarah or Istisna’ contract in certain jurisdictions.

CHAPTER 3: REPORTING POPULATION

64.

To establish the PIFS, the Compilation Guide has given due consideration to the

following two approaches:

a) data from IIFS are compiled at the national level by central banks/monetary

authorities (or other relevant supervisory authorities), or

b) data are collected directly from IIFS themselves through their annual reports,

quarterly releases or other regular financial publications.

65.

Since the PIFS are developed from the financial soundness and development

perspectives, the first approach has finally been adopted to ensure authenticity and
reliability whereby IIFS (individual data suppliers) will submit the consolidated underlying
data series to central bankers/monetary authorities or other relevant supervisory
authorities (national data compilers) who will then, at the national level, aggregate and
consolidate these data as well as calculate the identified PSIFIs for dissemination to the
public. Being in general the highest authority in a country as far as monetary and
financial system-related matters are concerned, central banks/monetary authorities (and
in some cases, in collaboration with other relevant supervisory authorities) in principle
have the legal powers to make it mandatory for IIFS under their supervision to furnish
pertinent data.

66. The Compilation Guide recommends national compilation by central
banks/monetary authorities (and other relevant supervisory authorities) to cover relevant
statistics from both full-fledged Islamic banks (stand-alone Islamic banks and Islamic
banking subsidiaries of conventional banks) and Islamic windows at conventional banks.

3.1

REPORTING CENTRAL BANKS/MONETARY AUTHORITIES OR OTHER

RELEVANT SUPERVISORY AUTHORITIES (COUNTRIES) OR PIFS COMPILERS

Eligibility criteria

68.

In view of the wide range of institutional and data coverage specified in the

Compilation Guide, the national “lead agency” most likely responsible for calculating and
disseminating PIFS is the central bank/monetary authority (or any other relevant
supervisory authority). Central banks/monetary authorities are deemed to be the most
proximate to data suppliers – that is, banking and near-banking IIFS. The Compilation
Guide recommends a “lead agency” to be designated as the contact point for user
queries on national PSIFIs, although the responsibility for the analysis and interpretation
of PSIFIs is a separate issue.

69.

In principle, the Compilation Guide encourages all central banks/monetary

authorities and any relevant supervisory authorities internationally, that regulate IIFS in
their jurisdiction, to join the community of PIFS compilers. It is estimated that IIFS are
present in more than 50 countries.

Present status

70.

In the initial stage, it is more realistic to look forward to the participation of only

central banks/monetary authorities that are IFSB members in the reporting population. At
present, the Compilation Guide counts on the following 18 central banks/monetary

authorities, which are either full or associate members of the IFSB, who could potentially
become PIFS compilers:

a) Bahrain Monetary Agency
b) Bangladesh Bank
c) Ministry of Finance, Brunei
d) People’s Bank of China
e) Central Bank of Egypt
f) Bank Indonesia
g) Central Bank of the Islamic Republic of Iran
h) Central Bank of Jordan
i) Central Bank of Kuwait
j) Banque du Liban
k) Bank Negara Malaysia
l) State Bank of Pakistan
m) Bangko Sentral ng Pilipinas
n) Qatar Central Bank
o) Saudi Arabian Monetary Agency
p) Monetary Authority of Singapore
q) Bank of Sudan
r) Central Bank of United Arab Emirates

71.

This list of potential PIFS compilers is subject to review, especially to reflect

changes in the IFSB membership, as new IFSB central bank/monetary authority
members and other relevant supervisory authorities may wish to join the community of
PIFS compilers.

3.2

REPORTING FINANCIAL INSTITUTIONS OR PIFS SUPPLIERS

Eligibility criteria

72.

In the Compilation Guide, all deposit-taking and financing IIFS, as defined in

paragraph 52, should qualify as reporting financial institutions vis-à-vis their central
banks/monetary authorities.

73.

The Compilation Guide envisages an all-encompassing and comprehensive

statistical coverage to provide a complete perspective that monitors the health and
soundness of the IFSI, and hence recommends that national compilation capture all
statistics related to banking and near-banking services that comply with SharÊ’ah rules
and principles from both full-fledged IIFS and Islamic windows (of conventional financial
institutions), if any. The emphasis of the Compilation Guide is therefore on the function
of an IIFS, and the type of SharÊ’ah compliant products and services offered, and not on
its name.

74.

A banking Islamic window is generally defined as part of a conventional financial

institution that undertakes SharÊ’ah compliant deposit-taking, financing, investment
and/or fund management activities. In principle, banking Islamic windows are potentially
self-contained in their SharÊ’ah compliant financial intermediation activities, and the
funds mobilised are invested in SharÊ’ah compliant assets. Thus, an Islamic window is a
virtual branch without separate legal existence within the parent institution. Being a

separate business unit that undertakes a complete range of financial intermediation
activities, from sourcing of funds to extension of financing, a banking Islamic window
shall be responsible to its fund providers such as savings and current account holders,
IAH and shareholders, in the same way as a full-fledged banking IIFS.

75.

The Compilation Guide acknowledges the potential burden due to the need to

adapt existing data systems in order to compile PSIFIs and the resulting costs – in
particular, for conventional banking groups with Islamic windows. Nevertheless, the
introduction of a cut-off level or minimum threshold for reporting materiality to reduce
costs would go against the objective of comprehensiveness of statistical coverage and
could hamper the development of the IFSI in general, insofar as Islamic windows may
strive to remain within the specified threshold.

Present status

76.

The Compilation Guide draws on the findings of the Survey on Compilation and

Dissemination Practices of Islamic Finance Statistics, which specified the following
categories of IIFS as eligible to become reporting financial institutions:

a) commercial banks;
b) finance companies;
c) postal savings banks;
d) development banks/financial institutions and microfinance institutions;
e) credit unions/institutions and/or cooperatives;
f) savings and loans associations;
g) building societies or mortgage banks; and
h) merchant or investment banks and discount houses.

77. The

first

FIVE

types of financial institution in the above list of categories of IIFS –

in particular, commercial banks – appear to be the most prevalent across countries. The
Compilation Guide recommends classifying commercial banks as banking IIFS and the
rest as near-banking IIFS. However, this list is not exhaustive and the classification as a
banking or near-banking IIFS will depend on the function of the IIFS, based on national
laws and practices, and not on its name.

78.

In the case where an IIFS is a bank under the law of a jurisdiction but not a

banking or near-banking IIFS as defined by the Compilation Guide, or conversely, not a
bank in a legal sense but meets the Compilation Guide’s definition of a banking or near-
banking IIFS, the IIFS in question should be classified as a banking or near-banking
IIFS, but its status should be explained and identified separately. Indeed, national
compilers are highly encouraged to specify the composition of reporting IIFS and the
nature of their major activities.

79.

National compilers may consider including any other IIFS that play a significant

role in a country’s money creation and monetary policy transmission – that is, those
whose liabilities are part of broad money as reporting IIFS. Nonetheless, the Compilation

This definition of Islamic window has been adapted from the IFSB Exposure Draft No. 4, “Disclosures to Promote

Transparency and Market Discipline for Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance
(

Takaful

) Institutions and Islamic Mutual Funds)”.

Guide recommends excluding from the community of data suppliers any of the above
financial institutions that are not regulated by respective central banks/monetary
authorities or any relevant supervisory authorities, especially if these financial institutions
make up an insignificant fraction of the domestic Islamic banking system. The rule of
thumb is that these IIFS must be established as components of the Islamic banking
system where they are operating, and hence are regulated by the respective central
banks/monetary authorities or any relevant supervisory authorities.

80.

The Compilation Guide also recommends that money market funds, and any

other financial institutions that engage primarily in securities activities and issue liabilities
not in the form of deposits, not be classified as banking or near-banking IIFS, although
their liabilities can be included in broad money.

81.

Clearly specifying the benefits of providing data to national compilers and

providing unambiguous guidance for efficient data collection would help to inculcate the
“culture of reporting” among data suppliers and raise their commitment to report on a
voluntary basis.

CHAPTER 4: THE SCOPE AND USE OF INTERNATIONALLY COMPARABLE PSIFIs

82.

The main purpose of the Compilation Guide is to provide guidance for national

compilers in preparing sectoral financial statements and memorandum series for IIFS in
order to calculate PSIFIs, which can be used to assist the assessment and monitoring of
the strengths, vulnerabilities and state of development of the domestic IFSI. The
proposed compilation methodology and the range of indicators (and underlying data)
covered take into account the diversity of circumstances of different countries.

83.

Since PSIFIs, which can be broken down into PIFIs and SIFIs, are mostly in the

form of ratios or percentages, the Compilation Guide provides definitions for the
underlying data series used to calculate them. A set of SIFIs is proposed to provide the
context for PIFIs and to help monitor developments of the IFSI.

84.

Financial Soundness Indicators are defined broadly as aggregate indicators of

the soundness and stability of the financial system as a whole and constitute the core
statistics used in macroprudential analysis. PSIFIs can be regarded as a set of FSIs
compiled on an aggregate basis for the IFSI, or as a peer group, supplemented with
additional structural indicators and particular definitions in order to reflect the specificities
of IIFS. PSIFIs should help facilitate an analysis of the strengths, vulnerabilities and
structure of the IFSI.

85.

Aggregated microprudential indicators are mostly derived from individual financial

institutions’ balance sheets and income and expense statements, as well as from other
detailed financial information. Some of the data required to calculate macroprudential
and microprudential indicators are already collected as part of various macrostatistical
frameworks, such as sectoral balance sheets and monetary and financial statistics.

4.1

THE USE OF PSIFIs AND MACROPRUDENTIAL ANALYSIS

86.

Macroprudential analysis aims to assess the soundness and stability of a

financial system by identifying the risks and vulnerabilities that could originate from
macroeconomic and institutional factors, both in the financial system as a whole as well
as in its various sub-sectors, including the IFSI. Indeed, such an analysis can be applied
to specific sub-sectors – such as the IFSI, for instance – to assess the risks and
vulnerabilities within the sub-sectors, as well as their contribution to the overall financial
stability.

87.

Macroprudential analysis of an IFSI requires FSI-like data in the form of PSIFIs,

which are adapted to cater to the specificities of Islamic finance. Analysis of PSIFIs can
be an important component for macroprudential analysis – in particular, in countries with
a considerable presence of IIFS. Even for countries whose IFSI is not significantly
important in terms of size compared to the overall financial system, monitoring of PSIFIs
may prove helpful in the context of overall macroprudential analysis, as well as to gauge
the contribution of the IFSI to economic development.

Definition of macroprudential analysis

88.

More specifically, macroprudential analysis consists of the analysis of the

macroeconomic and institutional determinants of financial soundness indicators for the
system as a whole, as well as for the key sub-systems such as the IFSI, complemented
by well-designed stress testing for groups of financial institutions, including the group of
IIFS. In particular, an analysis of the determinants of PSIFIs, supplemented by stress
testing of IIFS individually and as a group, covering a set of common macroeconomic
and institutional shocks, can be very useful in assessing the vulnerabilities of the IFSI as
well as its contribution to overall financial stability.

89.

Macroprudential analysis, as defined above, feeds into the overall financial

stability assessment, through the following sequence of steps:

a) analysis of the economic environment and structure of a financial system;
b) analysis of the levels, trends and determinants of FSIs in general, and PSIFIs in
particular, in order to gain an overview of the full financial system and its key sub-sectors
(including the IFSI);
c) analysis of the linkages that may exist between these indicators and changes in the
macroeconomic environment; and
d) analysis of qualitative information, such as the level of compliance with internationally
accepted prudential, accounting and auditing standards, among others – in particular, on
the correlation between the development of a sound financial system and effective
financial regulation and supervision.

90.

Step (b) above, which is the major part of macroprudential analysis, will provide

the key input for the overall assessment of financial system stability through regular
monitoring and analysis of information on FSIs in general and PSIFIs in particular.

91.

Vulnerabilities of a financial system may stem from various sources, such as

poor asset quality, undue exposures to credit and market risks, lack of capital,
deterioration in conditions of borrowers, and excessive government borrowing, as well
as from external developments, such as a huge current account deficit and/or extreme
fluctuations in the exchange rate. The occurrence of any such events, if left unchecked,
could lead to a financial system crisis with adverse implications for the economy, both
directly and indirectly.

92.

FSIs comprise aggregated microprudential indicators of the health of individual

financial institutions, typically characterised by capital adequacy, asset quality,
management quality, earnings and profitability, liquidity and sensitivity to market risks, as
well as macroeconomic variables associated with financial system soundness, such as
economic growth, balance of payments, inflation, interest and exchange rates. Financial
crises often occur when both types of indicators point to vulnerabilities – that is, weak
financial institutions in the face of macroeconomic shocks.

93.

Currently, the availability and use of aggregated Islamic prudential statistics for

macroprudential analysis is fairly limited, while the treatment of IIFS as a peer grouping

Adapted from Financial Sector Assessment – A Handbook (a joint World Bank–IMF publication)

in analytical work is also very rare. As such, the development of PIFS as proposed in the
Compilation Guide could be of significant value in facilitating macroprudential analysis.

94.

Nonetheless, it is important to note that the PSIFIs alone may not be sufficient to

meet all the needs of macroprudential analysis. PSIFIs constitute just one of the inputs
for macroprudential analysis and are part of a larger body of statistics and tools that can
be employed to monitor financial stability, which may include indicators that reflect a
broader picture of economic and financial circumstances; the institutional and regulatory
framework of an economy; the outcome of stress tests; and the structure and strength of
the financial system and infrastructure. Compilation and dissemination of PSIFIs and
their underlying data may prove useful in understanding and appreciating the complex
linkages among PSIFIs, as well as between PSIFIs and other macrostatistics and
economic data.

Integration into and interrelationships of PIFS with other macrostatistics

95. The common factor in the relationship between the PIFS and other
macrostatistics is the SNA 1993 and the International Standard Industrial Classification
of All Economic Activities (ISIC), in particular with respect to principles and concepts.
Harmonisation with macrostatistical systems, especially the SNA 1993, should foster
comparability across the major sets of macrostatistics within a country and across
countries. This comparability, in turn, promotes efficiency in data preparation, enhances
the analytical power of various sets of macrostatistics, and provides understanding of
statistics within and among countries.

96.

Monetary statistics consist of a comprehensive set of stock and flow data on the

financial and non-financial assets and liabilities of the financial corporations sector and
its sub-sectors for the purpose of monetary policy formulation and monitoring. Given the
monetary policy-related purposes, the focus is on data for the central bank and other
depositary corporations’ sub-sectors.

97.

Financial statistics provide data for use in compiling the financial accounts of the

SNA 1993, and cover all financial stocks and flows among all sectors of the economy
and between these sectors and the rest of the world – that is, they have a broader
coverage than monetary statistics.

98.

Data for a sectoral balance sheet and an income and expense statement are

obtained from individual IIFS within a sub-sector and are classified into standard
components in accordance with the sectorisation, instrument classification and
accounting principles of the Compilation Guide. The information presented, based on the
balance sheet, income and expense statement and memorandum series, constitutes the
underlying framework for organising the PIFS and connects the PIFS to other
macrostatistics.

Peer group analysis

99.

A peer group is a set of individual institutions that are grouped on the basis of

specific analytically interesting criteria for statistical comparison purposes. The IFSI itself

is an important peer group in the broader macroprudential analysis. In countries where
the IFSI makes up a significant share of the entire financial sector, additional peer
groups within the domestic IFSI could be considered. In fact, peer groups can be used to
compare PSIFIs of:

a) IIFS whose data are publicly available against the ratios of similar institutions;

b) one peer group with other domestic peer groups; and
c) peer groups across countries.

100. Peer group analysis would be important, since sectoral financial statements by
themselves can disguise some important trends. Depending on analytical purposes and
data availability (sometimes on an ad-hoc basis), different types of peer groups may be
created according to:

a) size of assets, revenues and/or capital, as well as the levels of return on assets,

return on equity and/or non-performing financing (NPF) – for

example,

peer

group of similarly sized IIFS based on their total assets

could help focus the analysis

of the impact of size on their structure,

soundness and competitiveness;

b) line of business – for example, by making a distinction between

commercial

banking IIFS, Islamic investment banks, Islamic mortgage banks and other specialist
institutions described as near-banking IIFS in

Chapters 2 and 3;

c) type of control and/or ownership – for example, by distinguishing between

publicly controlled and privately controlled IIFS;

d) offshore IIFS which are allowed to transact only with non-residents; and
e) concentration in financing towards particular types of customers.

4.2

SPECIFICATION OF PIFS, PIFIs AND SIFIs

101. The PIFS consist of two groups of statistics – namely, the PSIFIs, and the
underlying data series from which the PSIFIs are drawn. Underlying data series are
sourced from two major sets of information – namely, commercial (financial statements)
and supervisory-based series (including memorandum items in financial statements), as
well as national accounts-based data. PSIFIs, which can be broken down further into
PIFIs and SIFIs, are based on SharÊ’ah compliant contracts and are applicable to IIFS,
as discussed in Chapter 2, Section 2.2.

102. The Compilation Guide is intended to be a definitional guideline, in order to
facilitate convergence of best practices and to promote comparability of macrostatistics
within a country and across countries. Increased comparability should in turn promote
efficiency in data preparation and compilation, raise the analytical power of this set of
macrostatistics, and enable a common understanding of statistics within and among
countries.

Concepts of underlying data series

103. The underlying data series are derived from two major official sources of
information – namely, commercial accounting/supervisory data and national accounts-
based data. The Compilation Guide recommends consistent application of accounting
rules and principles in order to avoid asymmetries between the commercial

accounting/supervisory data and the macro-based data, such as national accounts,
monetary aggregates and financial statistics.

104. Underlying data series used to calculate individual PSIFIs are defined in Chapter
6, although, in practice, the definitions of available underlying data series may vary
across countries and differ from the guidance provided in the Compilation Guide. Major
differences between national accounts-based data and commercial
accounting/supervisory-based data arise from the different purposes for which these
data are compiled.

105. While commercial accounting and supervisory approaches favour consolidation
of accounts at the group level, or consolidation of activities of subsidiaries and branches
with the parent regardless of location, national accounts-based data focus on gross
output and activities of individual entities within the group located in the domestic
economy. The PIFS, like commercial accounting and the supervisory approach,
advocate a consolidated approach to avoid the double counting of capital and
activities

, as opposed to national accounts-based data, which aim exclusively to

capture all economic activities.

106. In a nutshell, national accounts-based data are more suitable for monitoring
domestic economic developments on an aggregate basis (summation of flows and
positions within the group), while commercial and supervisory data are more appropriate
for monitoring developments of banking and near-banking IIFS groups on a
consolidated group basis

(elimination of intra-group flows and positions).

107. The fact that underlying data series are drawn from internally consistent financial
statements, which comprise, in particular, income and expense statements and balance
sheets, should enhance the analytical usefulness of PSIFIs and contribute to the
statistical quality control in view of the inter-connection between financial statement
items.

The PIFI framework

108. The PIFI framework, similar to the existing statistical frameworks, has the
flexibility to:

a) allow the introduction of some additional PIFIs (and SIFIs) that are beyond the

agreed list as described in the Compilation Guide, if such additional

indicators are

needed to reflect the analytical needs and country circumstances; and

b) take into account and build on the related data requirements of other

international organisations such as the BIS and IMF.

109. To allow country-specific circumstances, the Compilation Guide does not provide
numerical benchmarks or quantitative targets for each PIFI. The PIFI framework
underscores the need for a symmetric recording of flows and positions within a sector in
order to avoid distortions in sectoral data, but not necessarily among sectors since the
required types of data differ by sector.

110. The

CAMELS

(please see below for an elaboration of this acronym) framework is

an analytical framework for effective supervision of the health of individual financial
institutions. This framework can also be used to derive indicators to monitor the

soundness of the financial system as a whole by aggregating the data on the soundness
of individual financial institutions based on the CAMELS framework. Indeed, the
CAMELS model provides a measure of the relative soundness of a bank and is often
calculated by some supervisory authorities on a scale of 1 to 5, with 1 indicating the
strongest performance.

111. The Compilation Guide adopts a variant of the CAMELS framework in identifying
indicators that cater to the specificities of Islamic finance from the perspectives of
regulation, risk management and disclosure. The acronym CAMELS entails the analysis
of six groups of indicators on Islamic banking operations and financial soundness –
namely, Capital adequacy; Asset quality; Management soundness; Earnings and
profitability; Liquidity; and Sensitivity to market risk and other risks to which banking and
near-banking IIFS are exposed.

112. In addition to the CAMELS framework, national supervisory authorities may
consider a risk-based framework for supervision as a model to develop and compile
additional indicators to supplement the PSIFIs, an option particularly relevant for
jurisdictions with a risk-based approach to supervision. However, these additional
indicators should be consistent with the IFSB Guiding Principles of Risk Management.

I. Capital

adequacy

113. In the standard CAMELS framework, capital adequacy of a bank is assessed
according to:

a) volume of risk assets;
b) volume of marginal and inferior assets;
c) growth experience, plans and prospects;
d) strength of management in relation to all the above factors; and
e) capital ratios relative to its peer group.

114. While most of these criteria are applicable to IIFS, the rating factor or the risk
weight of the volume of risk assets warrants a closer inspection. An IIFS will have to set
aside capital to cover three types of risk, namely:

a) credit risk – that is, the risk of loss due to a counterparty defaulting on a contract;
b) market risk – that is, the risk of losses on on-and-off-balance sheet positions

arising from movements in market prices; and

c) operational risk – that is, the risk of losses resulting from inadequate or failed
processes, people or systems, or due to external events.

115. For a banking or near-banking IIFS, exposures to credit risk arise in connection
with accounts receivables in Murabahah contracts; counterparty risk in Salam contracts;
account receivables and counterparty risk in IstisnÉ´ contracts; lease payments
receivable in IjÉrah contracts; and certain investments by means of MushÉrakah or
MuÌÉrabah contracts in the banking book. The capital charge for credit risk takes into
account:

a) the credit risk rating of a counterparty and the use of any credit risk mitigation
techniques;
b) types of underlying assets that are sold or collateralised or leased by an IIFS; and
c) the amount of specific provisions made for the overdue portion of accounts
receivable or lease payments receivable.

116. IIFS with exposures to risks arising from equity positions in the trading book,
trading positions in SukËk, foreign exchange risk, commodity risk or inventory risk are
subject to market risk capital requirements. The operational risk for IIFS includes,
among others, legal and SharÊ’ah non-compliance risks.

117. In principle, the ratio of riskier assets to total assets would typically be higher in
an IIFS than in a conventional bank insofar as the bulk of the former’s assets were made
up of profit-sharing-based financing. In practice, however, such financing constitutes
only a small fraction of the total assets of an IIFS. Even for non-profit-sharing modes,
both credit and market risks are combined in these exposures due to the fact that the
ownership of assets is embedded in the contract (at least at some stages of the
contract). This phenomenon has to be reflected in risk weights.

118. Insofar as losses arising from assets or investments financed by PSIA funds are
borne by IAH, these assets do not attract credit and market risk regulatory capital
charges, as reflected in the formula for the capital adequacy ratio (CAR) in the IFSB’s
Capital Adequacy Standard (CAS). Nevertheless, the operational risk of such assets is
taken into account in the IFSB’s CAS.

119. In complementing Pillar I of Basel II, the IFSB’s CAS is designed to cater for the
specificities of banking and near-banking IIFS, as well as other SharÊ’ah compliance
issues, which are not addressed specifically by Basel II. In particular, how risks are
bundled in one transaction, and how they are transformed at different stages of
transactions, are among the elements that the IFSB’s CAS seeks to capture. As
mentioned in Chapter 2, Section 2.1, unlike conventional banks, banking and near-
banking IIFS usually undertake the combination of commercial banking and investment
banking/asset management activities but without legal, financial and administrative
separation.

120. To reflect this feature, the IFSB’s CAS has adopted a cross-sectoral approach
that combines both depositors’ protection and investment management considerations.
Largely based on the Basel approach, the IFSB’s CAS adopts risk weights derived from
those proposed in Basel II – namely, the Standardised approach for credit risks; the
1996 Market Risk Amendments (Standardised Measurement Method) for market risks,
and the Basic Indicator Approach for operational risks. In addition, the IFSB’s CAS
allows for supervisory discretion to include a portion of risk-weighted assets (for credit
and market risks only) funded by a PSIA in the denominator of the capital adequacy
formula, thereby reflecting the possibility of sharing risks between IAH and IIFS in the
course of the investment management by an IIFS.

121. The IFSB’s CAS is structured in a matrix format to take into consideration the
transformation of risks at different stages of a contract. For example, in the case of
asset-based instruments, the risk exposure of an IIFS transforms from market risk to
credit risk when an asset is sold to its customer, as the price risk of holding that asset
ceases and is replaced by credit risk. The following table set out the differences risk
between IFSB’s CAS and Basel II.

Table 4.1: Mapping between IFSB’s CAS and Basel II for credit risk

Criteria

IFSB’s CAS (standardised
approach)

Basel II (standardised
approach)

1. Risk weight (RW)

Calibrated on the basis of
external ratings by the External
Credit Assessment Institutions
(ECAIs),

RW varies according to

contract stages and financing
modes.

Calibrated on the basis of
external ratings by the
ECAIs.

2. Treatment of
equity in the banking
book

Simple RW method (RW of
300% or 400%) or supervisory
slotting method (RW of 90% to
270%)

≥ 150% for venture capital
and private equity
investments

3. Credit risk
mitigation techniques

Hamish jiddiyah, urboun, PSIA
or cash deposit with other IIFS,
guarantees, financial collateral,
asset pledging, etc.

Financial collateral, credit
derivatives, guarantees,
netting (on- and off-balance
sheet)

Table 4.2: Mapping between IFSB’s CAS and Basel II for market risk

Criteria

IFSB’s CAS (standardised
approach)

Basel II (standardised
approach)

1. Category

Equity risk, forex risk, interest
rate risk in the trading book,
commodity risk, inventory risk

Equity risk, forex risk,
interest rate risk in the
trading book, commodity risk

2. Measurement

1996 Market Risk Amendments
(Standardised Measurement
Method)

1996 Market Risk
Amendments (Standardised
and Internal Models)

Table 4.3: Mapping between IFSB’s CAS and Basel II for operational risk

Criteria

IFSB’s CAS (standardised
approach)

Basel II (standardised
approach)

1. Gross income

Annual average gross income
during the previous three years,
excluding PSIA’s share in the
income

Annual average gross
income during the previous
three consecutive years

Table 4.4: Summary of capital charges for different types of contracts

Type of contract

Capital charge for credit risk

Capital charge for market risk

1. Murabahah 8%

capital charge on the

assets sold and delivered to a
customer

15% capital charge for assets
available for sale

2. Salam

8% capital charge on payment
of the purchase price to a Salam
customer

15% capital charge on a long
position

Since most IIFS are exposed to unrated customers, 100% risk weight is equivalent to 8% capital charge.

3. Salam with
parallel Salam

8% capital charge on payment
of the purchase price to a Salam
customer. No netting of Salam
exposures against parallel
Salam exposures.

15% capital charge on net long
or short positions, plus 3%
capital charge on gross
positions (for the basis risk)

IjÉrah

Muntahia
Bittamleek

8% capital charge on total
estimated value of lease
receivables for the whole
duration of the leasing contract

15% capital charge for assets
available for sale

5. MushÉrakah

32% capital charge on all equity
exposures in the banking book.
24% capital charge may be
applied in the case where the
equity is liquid and publicly
traded

Not applicable

6. MuÌÉrabah

32% capital charge on the
amount contributed to the
business venture, less any
specific provisions

Not applicable

II. Asset

quality

122. In the standard CAMELS framework, asset quality of a bank is assessed
according to:

a) the level, distribution and severity of classified assets;
b) the level and composition of non-accrual and reduced rate assets;
c) the adequacy of valuation reserves; and
d) the demonstrated ability to administer and collect problem credits.

123. In relation to (a) above, profit-sharing assets cannot be classified until the
underlying contracts expire. Barring proven negligence or mismanagement on the part of
the agent-entrepreneur, there is no recognisable default until the expiry of underlying
contracts. Default of PS contracts implies that investment projects have failed to deliver
what was expected – that is, either profits are below expectations, or there is a loss. or
there is non-delivery of the contractual value of investments (after taking into account
profits or losses). Also, the classification of sales- or asset-based contracts according to
loan quality could differ from those used in conventional banks, on account of the
specific contractual feautures that affect the probability of default and loss given default.

129. In relation to (b) above, as part of a prudent, proactive and forward-looking
stance, it is advisable to consider PS assets as reduced-rate assets – that is, they are
estimated to yield lower or no profit even before the expiration of the underlying
contracts.

130. In relation to (c) above, any reduction in the capital value of PSIA in case of
losses should not be viewed as tantamount to an automatic setting aside of provisions
against financing losses (financing-loss provisioning).

131. In relation to (d) above, the ability of an IIFS to administer and collect problem
credits should be assessed in the event when PS contracts do default before expiration
because of negligence or mismanagement on the part of the agent-entrepreneur, as well
as defaulting non-PS contracts.

III. Management

132. In the standard CAMELS framework, the management quality of a bank is
assessed according to:

a) its technical competence, leadership and administrative ability;
b) its compliance with banking regulations and statutes;
c) its ability to plan for and respond to challenging circumstances;
d) the adequacy of, and compliance with, internal policies;
e) any tendencies towards self-dealing; and
f) its demonstrated willingness to serve the legitimate needs of the

community.

133. All these criteria are applicable to IIFS, although the management’s specific
competence in Islamic banking practices and procedures is a critical evaluation
parameter

In particular, the Compilation Guide includes the management policy on

prudential reserves such as PER and IRR.

IV. Earnings and profitability

134. In the standard CAMELS framework, earnings are assessed according to:

a) ability to cover losses and provide adequate capital;
b) earnings trends;
c) peer group comparisons; and
d) quality and composition of net income.

135. All these criteria are applicable to IIFS, although in an IIFS economic losses
would first result in a depreciation of the value of the IAH’s wealth and then affect the
IIFS’ equity position if it had resorted to its own resources to finance the loss-making
investment project. The occurrence of such risks to PSIA could also result in reputational
damage and loss of an IAH base, leading to liquidity strains and, possibly, insolvency.
Therefore, the PIFI on income should help to monitor income generated from and paid
out to different sources of funds, so that the returns for and loss absorption by each fund
provider can be measured.

V. Liquidity

136. In the standard CAMELS framework, liquidity is assessed according to:

a) volatility of deposits;
b) reliance on funds sensitive to changes in the benchmark market rate;
c) technical competence relative to the structure of liabilities;
d) availability of assets readily convertible into cash; and

e) access to interbank markets or other sources of funds, including

lender-of- last resort (LLR) facilities provided by a central bank.

137. While conventional banks have obligations towards all depositors, IIFS have
obligations only towards demand deposit holders since IAH are akin to “passive
investors” who bear their own risk of potential losses on assets or investments financed
by PSIA funds with no guarantee on the capital amount of PSIA.

138. Under-development or virtual non-existence of money markets, and the limited
availability of LLR facilities which are compatible with SharÊ’ah rules and principles, could
complicate the liquidity management of IIFS and increase their exposure to liquidity
shocks. As such, monitoring of liquidity risk exposures, using appropriate indicators, is
particularly important.

VI. Sensitivity to market risks

139. In the standard CAMELS framework, sensitivity to market risk is assessed by the
degree to which changes in market prices – particularly interest rates, exchange rates,
commodity prices and equity values – adversely affect a bank.

140. Unlike conventional banks, IIFS are directly exposed to commodity price risk
because they typically carry inventory items – in particular, in a Salam contract whereby
an IIFS agrees to take delivery of a commodity at a future date against the current
payment, or to hold the commodity until it can be converted into cash. IIFS are also
exposed to equity price risk, due to the equity financing nature of PS contracts in Islamic
finance.

141. While IIFS are exposed to exchange rate risk, in the same way as conventional
banks in principle, variations in market interest rates have an indirect impact on IIFS
through the obligation, for competitiveness purposes, to offer a profit rate on PSIA that
reflects the prevailing benchmark market rates, which may not match the rate of return
earned on PSIA-funded assets. In such circumstances, an IIFS may be under market
pressure to pay IAH a profit rate that exceeds the rate of return it has earned on the
assets financed by IAH when the latter is lower than the profit rate being offered by
competitors.

142. Indeed, rate of return risk refers to the possible impact on the net income of an
IIFS due to changes in the market rates and relevant benchmark rates of return on
assets and profit rate payable to fund providers – in particular, IAH.

Rate of return risk

differs from interest rate risk in the sense that IIFS are concerned with returns on their
investment activities at the end of the investment-holding period, and with the impact on
net income of sharing returns with IAH.

143. Such rate of return risk could become more apparent when, for example, PSIA
funds are invested in medium- or long-term assets that will not be re-priced despite
changes in market rates. For instance, no re-pricing is permitted for instalments payable
under Murabahah contracts, although rentals under IjÉrah contracts may be re-priced. In
the event of an upward change to the benchmark interest rate, an IIFS whose asset

Adapted from the IFSB Guiding Principles of Risk Management, December 2005.

portfolio is mostly Murabahah-dominated could be exposed to a mismatch between the
rate of return receivable on Murabahah assets and the profit rate expected by fund
providers.

144. At the same time, the prohibition against riba and some unresolved fiqh (pl check
spelling of “fiqhi”}}issues in the interpretation of gharar translate into fewer hedging
opportunities for IIFS in view of the unavailability or non-acceptance of SharÊ’ah
compliant substitutes for conventional market risk hedging instruments and techniques,
such as forwards, swaps, futures and options.

Calculations of PSIFIs

145. PSIFIs are statistics in ratio or percentage terms, which look at the relationships
between at least two underlying data series or variables (stock and/or flow-type of data).
For each ratio, the underlying data used for both the numerator and the denominator
should be of the same periodicity. The underlying data could be either flows recognised
during the period, positions as at end-period, or an average of period positions.

146. These indicators (as well as their underlying data), which are grouped into core
and encouraged sets, have been chosen according to the following selection criteria:

(a) analytical significance of selected indicators and their focus on core markets

and institutions;

(b) perceived usefulness or importance of data as revealed by average

usefulness scores in the findings of the Survey on Compilation and
Dissemination Practices of Islamic Finance Indicators;

central banks/monetary authorities as revealed by the Survey findings;

(d) material relevance in most circumstances to a wide range of countries – that

is, not country-specific; and

(e) other empirical evidence.

147. Core indicators fulfil all the selection criteria listed above, while the encouraged
set may comply with some but not all. In principle, as far as monitoring of financial
soundness and stability is concerned, core indicators are meaningful, essential, relevant
and analytically significant across all countries, while encouraged indicators may be
important and relevant for financial stability assessment in some countries but of less
relevance or significance in others and, hence, may be developed according to specific
country circumstances. As such, the emphasis of the Compilation Guide is on the core
set of indicators (and their underlying data), followed by the encouraged set of indicators
(and their underlying data).

148. Ideally, ratio-type indicators should ensure international comparability of data,
while a ratio analysis allows more meaningful intra-industry comparison across countries
and over periods. However, since most PSIFIs are in the form of ratios, definitions for
the underlying data series used to calculate them are of the utmost importance.

149. For enhanced cross-country comparability and increased quality control of
published data, the Compilation Guide recommends calculating core and encouraged
indicators that are based on internationally accepted accounting principles, standards
and frameworks (please refer to Chapters 5 and 6), prudential and statistical standards,

as well as harmonised aggregation and consolidation practices (please refer to Chapters
7 and 8).

150. Ultimately, PSIFI compilation (and dissemination) should contribute towards
convergence of internationally agreed best practices and standards, although, in the
near term, most PSIFIs can be compiled from unharmonised underlying principles,
frameworks and standards.

151. The rationale for working with two sets of indicators (and of underlying data) is to
avoid a one-size-fits-all approach, and to provide a certain degree of flexibility in using
indicators for assessment of the strengths (and vulnerabilities) of the IFSI. Indeed, each
participating country will have the latitude to combine core indicators with some selected
encouraged indicators, depending on its level of financial sector development,
institutional structure, and context in the region. Depending upon the analytical needs
and relevance according to country circumstances, national compilers may calculate
additional PSIFIs that are not specifically described in the Compilation Guide, using the
concepts and definitions provided for the underlying series.

Exposition of PSIFIs

152. The Compilation Guide recommends two styles of presentation for core and
encouraged PSIFIs: prudential (PIFIs) and structural (SIFIs) indicators presented
separately; or according to whether the PSIFIs are capital-based, asset-based, or
income and expense-based. In total, there are 25 core PSIFIs and 27 encouraged
PSIFIs, broken down into prudential and structural Islamic finance indicators, which are
listed in table 4.5 separately for the core and encouraged categories.

PIFIs and SIFIs

Table 4.5: List of core and encouraged Islamic finance indicators by prudential
and structural breakdown

CORE SET

PIFIs

1(a) Capital adequacy ratio (standard formula)
1(b) Capital adequacy ratio (supervisory discretion formula)
2. Ratio of regulatory Tier 1 capital to total risk-weighted assets

CAPITAL
ADEQUACY

3. Ratio of credit risk-weighted assets to total risk-weighted assets
1. Gross non-performing financing (NPF) ratio

ASSET QUALITY

2. Net NPF-to-capital ratio
1(a) PER and IRR-to-PSIA ratio for restricted IAH

MANAGEMENT
POLICY ON
PRUDENTIAL
RESERVES

1(b) PER and IRR-to-PSIA ratio for unrestricted IAH

GENERAL
1. Financing income ratio
2. Fee-based income ratio
3. Cost-to-income ratio
SHAREHOLDERS’ PERSPECTIVE
1. Return on assets (ROA)
2. Return on equity (ROE)
IAH’S PERSPECTIVE
1(a) Average actual rate of return or profit rate to restricted IAH

EARNINGS &
PROFITABILITY

1(b) Average actual rate of return or profit rate to unrestricted IAH
1. Liquid asset ratio

LIQUIDITY

2. Ratio of liquid assets to short-term liabilities
1. Ratio of foreign exchange net open positions to capital

SENSITIVITY TO
MARKET RISK

2. Ratio of commodity net open positions to capital

CORE SET

SIFIs

1. Percentage of each type of SharÊ’ah compliant financing contract
to total SharÊ’ah compliant financing
2. Ratio of total SharÊ’ah compliant financing to overall financing
3. Sectoral distribution (by economic activities) of SharÊ’ah
compliant financing
4. Ratio of total SharÊ’ah compliant funding to overall funding and
liabilities

FINANCING AND
FUNDING

5. Ratio of PSIA to total SharÊ’ah compliant funding
1. Number of total banking and near-banking IIFS
2. Number of resident branches per hundred thousand inhabitants
3. Number of resident foreign-owned branches and/or banking
subsidiaries per hundred thousand inhabitants

INFRASTRUC-
TURE

4. Number of overseas branches and/or banking subsidiaries per
hundred thousand inhabitants in host countries

ENCOURAGED SET

PIFIs

1. Ratio of market risk-weighted assets to total risk-weighted assets
2. Ratio of operational risk-weighted assets to total risk-weighted assets
3. Ratio of specific provisions (SP) to total financing by type of SharÊ’ah compliant
contracts
4. Percentage of gross NPF by type of SharÊ’ah compliant contracts
5. Percentage of gross NPF by economic activities
6. Coverage ratio
7. Investment income ratio
8. Ratio of SharÊ’ah non-compliant income (if any)
9. Return on financing
10. Percentage of income distributed to IAH out of total gross income of IIFS
11. Ratio of total off-balance sheet items to total assets
12. Spread between reference rates (country-specific) and rates of return or profit rates
to IAH of comparable maturities
13. Spread between average return on financing for all types of SharÊ’ah compliant
contracts and (average rate of return or profit rate to IAH, as well as to SharÊ’ah
compliant savings account holders)
14. Funding-to-financing ratio in aggregate
15. Ratio of equity net open positions to capital
16. Ratio of real assets held for sales financing to capital
17. Ratio of foreign currency-denominated financing to total SharÊ’ah compliant financing
18. Ratio of foreign currency-denominated funding (ex-shareholders’ equity) to total
SharÊ’ah compliant funding (ex-shareholders’ equity)
19. Ratio of sukËk holding to capital

A. PIFIs

153. PIFIs are indicators that help to monitor the strengths and vulnerabilities of the
IFSI with the objective of enhancing financial soundness and stability of the IFSI. There
are 16 PIFIs in the core set and 19 in the encouraged set.

Core PIFIs

1(a) CAR (Standard formula)

= Amount of regulatory capital/{Amount of total risk-

weighted assets

(RWA) for credit and market risks + Capital charge for

operational risks – Amount of total RWA funded by PSIA for credit and market
risks

} whereby:

Amount of total RWA funded by PSIA

= Amount of RWA funded by restricted

PSIA + RWA funded by unrestricted PSIA

1(b)

CAR (Supervisory Discretion formula)

= Amount of regulatory

capital/Amount of total adjusted RWA whereby:

Total RWA are financed by both restricted and unrestricted PSIA.

Credit and market risks in this formula are for on- and off-balance sheet exposures.

In the case where PSIA funds are commingled, the RWA funded by PSIA are calculated based

on their pro-rata share of the relevant assets. PSIA balances include PER, IRR and any other
equivalent reserves.

ENCOURAGED SET

SIFIs

1. Percentage of SharÊ’ah compliant financing (by categories of counterparty/institutional
sectors) to total financing
2. Geographical distribution of SharÊ’ah compliant financing (for exposure to country or
regional risk)
3(a) Resident employees-to-branches ratio (of domestically incorporated IIFS and/or
foreign-controlled IIFS)
3(b) Overseas employees-to-branches ratio (of domestically incorporated IIFS)
4. Ratio of executive employees to total employees
5(a) Size of the Islamic banking segment vis-à-vis the overall financial system (in asset
terms)
5(b) Financing-to-GDP ratio
6. Size of the Islamic non-banking segment vis-à-vis the overall financial system (in
asset terms)
7(a) Size of the Takaful segment vis-à-vis the overall financial system (in asset terms)
7(b) Gross contributions-to-GDP ratio
8(a) Size of the Islamic capital market vis-à-vis the overall financial system (in asset
terms)
8(b) Market capitalisation-to-GDP ratio

Amount of total adjusted RWA = Amount of total RWA for credit and market
risks + Capital charge for operational risks – Amount of RWA funded by
restricted PSIA for credit and market risks – (1-α

) Amount of RWA funded by

unrestricted PSIA for credit and market risks – (α) Amount of RWA funded by
PER and IRR of unrestricted PSIA for credit and market risks

Ratio of regulatory Tier 1 capital to total RWA

= Amount of Tier 1

capital/Amount of total RWA

Ratio of credit risk-weighted assets (CRWA) to total RWA

= Amount of

CRWA/Amount of total RWA

Gross non-performing financing (NPF) ratio

= Amount of total gross

NPF/Amount of total financing (outstanding)

Net NPF-to-capital ratio

= Amount of total gross NPF net of specific provisions

(SP)/Amount of capital and reserves

6(a)

PER and IRR-to-PSIA ratio for restricted IAH

= Amount of PER and IRR

allocated to restricted IAH/Amount of restricted PSIA

6(b)

PER and IRR-to-PSIA ratio for unrestricted IAH

= Amount of PER and IRR

allocated to unrestricted IAH/Amount of unrestricted PSIA

Financing income ratio

= Amount of net income from financing

activities/Amount of total gross income whereby:
Net income from financing activities = Amount of financing income generated
from shareholders’ funds + Amount of financing income generated from PSIA
funds + Amount of financing income generated from funds of SharÊ’ah
compliant savings and current accounts – Amount of income attributable to IAH
and savings and current account holders
Gross income = Amount of net income from financing activities + Amount of all
non-financing income (investment income and fee-based income) out of jointly
funded and non-jointly funded assets

α refers to the proportion of assets funded by unrestricted PSIA that would be subject to capital

requirements for credit and market risk. To be determined by supervisory authorities, the value
of α may vary based on supervisory authorities’ discretion on a case-by-case basis. “Displaced
commercial risk (DCR)” refers to the magnitude of risks transferred to shareholders in order to
cushion the volatility of returns to IAH, who, in principle, bear all of the investment risks under
the Mudarabah contract. Under the Mudarabah contract, unrestricted IAH carry the aggregate
impact of most banking risks, such as credit, market and rate of return risks, but may benefit
from the DCR assumed by IIFS. Such transfer of risks (and returns) from IAH to shareholders
requires appropriate inclusion of a fraction of the RWA funded by IAH in the denominator of the
CAR formula, as specified in the IFSB CAS. The PER may help mitigate the displaced
commercial risk, while the IRR may help minimise any future losses on investments financed by
PSIA funds. For further discussion, please refer to the IFSB Exposure Draft No. 4, “Disclosures
to Promote Transparency and Market Discipline for Institutions Offering Only Islamic Financial
Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds)”.

Fee-based income ratio

= Amount of income from fee-generating

activities/Amount of total gross income whereby:
Income from fee-generating activities = Amount of fee-based income generated
from shareholders’ funds + Amount of fee-based income generated from PSIA
funds + Amount of fee-based income generated from funds of SharÊ’ah
compliant savings and current accounts

Cost-to-income ratio OR ratio of non-financing-related expenses to gross
income

= Operating expenses/Total gross income whereby:

Operating expenses = Personnel, administrative and other overhead expenses

10.

Return on assets (ROA)

= Amount of total net income/Amount of total assets

11.

Return on equity (ROE)

= Amount of total net income/Amount of capital and

reserves

12(a)

Average actual rate of return or profit rate on restricted PSIA by maturity

(1-month, 3-month, 6-month, 9-month, 12-month, 18-month, 24-month, 36-
month-and-beyond maturities)

12(b)

Average actual rate of return or profit rate on unrestricted PSIA by maturity

(1-month, 3-month, 6-month, 9-month, 12-month, 18-month, 24-month, 36-
month-and-beyond maturities)

13.

Liquid asset ratio

= Amount of total liquid assets/Amount of total assets

14.

Ratio of liquid assets to short-term liabilities

= Amount of total liquid

assets/Amount of total short-term liabilities

15.

Ratio of foreign exchange net open positions to capital

= Amount of total

net open positions in foreign currencies/Amount of capital and reserves

16.

Ratio of commodity net open positions to capital

= Amount of total net

open positions in commodities/Amount of capital and reserves
Note:

Mostly for Salam or Bay’ Muajjal contracts

Encouraged PIFIs

Ratio of market risk-weighted assets (MRWA) to total RWA

= Conversion

factor

x the amount of capital charge for market risk (translated from a fixed

percentage of average annual gross income or any other method
used)/Amount of total RWA

Ratio of operational risk-weighted assets (ORWA)

to total RWA =

Conversion factor x the amount of capital charge for operational risk (translated
from a fixed percentage of average annual gross income or any other method
used)/Amount of total RWA

Ratio of SP to total financing for each type of

SharÊ’ah compliant contract

= Amount of SP or specific allowance for bad and doubtful financing/Amount of
total financing (outstanding) – for example:

Amount of SP for Murabahah financing/Amount of total financing (outstanding)

Percentage of gross NPF by type of

SharÊ’ah compliant contract – for

example:

Amount of NPF for Murabahah financing/Amount of total Murabahah financing

x 100

Percentage of gross NPF by economic activities as identified in the ISIC,
Rev. 4

(December 2005) – for example:

Amount of NPF for financing extended to the manufacturing sector/Amount of

total NPF x 100

Coverage ratio or ratio of general provisions (GP) to NPF

= Amount of GP

or general allowance for bad and doubtful financing/Amount of NPF

Investment income ratio

= Amount of income from non-financing investment

activities/Amount of total gross income whereby:

Income from non-financing investment activities = Income arising from

securities such as sukËk, shares and other financial assets held for trading or
investment purposes = Amount of non-financing investment income generated
from shareholders’ funds + Amount of non-financing investment income
generated from PSIA funds + Amount of non-financing investment income
generated from funds of savings and current accounts

Ratio of

SharÊ’ah non-compliant income (if any) = Amount of income arising

from prohibited activities and/or SharÊ’ah non-compliant sources of
funds/Amount of total gross income

The conversion factor is the reciprocal of the minimum CAR. As such, the conversion factor

may vary according to the minimum CAR adopted in a jurisdiction. For instance, a minimum
CAR of 8% will translate into a conversion factor of 12.5, 10% into 10, and 20% into 5,
respectively.

Return on financing extended for each type of

SharÊ’ah compliant

contract (%)

– for example:

Average return on Murabahah financing extended

10.

Percentage of income distributed to IAH out of total gross income of IIFS

= Amount of profit distributed to IAH/Amount of total gross income of IIFS x 100

11.

Ratio of total off-balance sheet items to total assets

= Amount of total off-

balance sheet items/Amount of total assets

12.

Spread between reference rates

(country-specific) and rates of return or

profit rates to IAH of comparable maturities

13.

Spread between average return on financing for all types of

SharÊ’ah

compliant contracts and average rate of return or profit rate to IAH, as
well as to

SharÊ’ah compliant savings account holders

14.

Funding-to-financing ratio in aggregate

= Amount of total PSIA, SharÊ’ah

compliant savings and current accounts/Amount of total financing (outstanding)

15.

Ratio of equity net open positions to

capital = Amount of total net open

positions in equity (only for tradable instruments)/Amount of capital and
reserves

Note: Tradable instruments may include MuÌÉrabah and MushÉrakah contracts.

16.

Ratio of real assets held for sales financing to capital

= Amount of total real

assets held for sales financing/Amount of capital and reserves

Note: Mostly for Murabahah, IjÉrah or Istisn’a contracts.

17.

Ratio of foreign currency-denominated financing to total financing

Amount of foreign currency-denominated financing (outstanding)/Amount of
total financing (outstanding)

18.

Ratio of foreign currency-denominated funding (ex-shareholders’ equity)
to total funding

(ex-shareholders’ equity) = Amount of foreign currency-

denominated funding (ex-shareholders’ equity)/Amount of total SharÊ’ah
compliant funding (ex-shareholders’ equity)

19.

Ratio of the value of

sukËk positions to total capital = Amount of sukËk

(market value) holding of IIFS/Amount of capital and reserves

A reference rate is any publicly available or observable market rate for benchmark funds

specific to a country. This quoted market rate, usually for a short-term horizon such as the
LIBOR (UK), KLIBOR (Malaysia) and SIBOR (Singapore), can be used as a benchmark or
basis to price many other financial instruments and securities in a jurisdiction or even beyond.

B. SIFIs

154. Each country has its own unique financial structure developed over time
according to history and culture, which could affect the extent of data availability and the
assessment of PIFIs disseminated. The extent of financial intermediation, especially
through banking and near-banking IIFS as well as the strength of the financial
infrastructure and payment-settlement system, could give an indication of the level of
development of the IFSI in a country.

155. SIFIs could facilitate assessments related to the financial structure, the breadth
and level of development of a country’s IFSI, as well as accessibility of the population to
different IFSI segments – in particular, through indicators that could demonstrate the
outreach of IIFS, the branch network or the branch distribution.

156. These indicators may include underlying data such as the number of banking and
near-banking IIFS in the financial system, number of domestically incorporated IIFS,
number of resident branches and subsidiaries of foreign-controlled IIFS, number of all
resident branches, number of employees per resident branch on average, etc.

157. SIFIs may influence the interpretation of macroprudential analysis and provide
the context for the assessment of the PSIFIs as a whole. For instance, the number of all
resident branches in the economy could suggest the size of Islamic banking and the
degree of competition among IIFS in an economy, while the number of overseas
branches and/or banking subsidiaries, located and operating abroad, of domestically
incorporated IIFS could indicate the extent of cross-border ownership and international
penetration of domestic IIFS. On the other hand, the number of resident foreign-owned
branches and subsidiaries could indicate the extent of foreign ownership in a country’s
Islamic banking. There are nine SIFIs in the core set and eight in the encouraged set.

158. The Compilation Guide encourages the compilation and dissemination of some
structural indicators which are not associated with Islamic banking for an overview of the
relative size, importance and depth of other segments of the IFSI vis-à-vis the Islamic
banking and near-banking segment, as well as a country’s financial system as a whole.
For example, SIFIs related to Islamic capital markets could suggest the extent to which
capital markets are used to raise funds in a SharÊ’ah compliant manner.

Core SIFIs

Percentage of financing (by type of

SharÊ’ah compliant contract) to total

SharÊ’ah compliant financing – for example:
Amount of Murabahah-based financing (outstanding)/Amount of total SharÊ’ah
compliant financing (outstanding) x 100

Ratio of total

SharÊ’ah compliant financing to overall financing = Amount of

total SharÊ’ah compliant financing (outstanding)/Amount of overall financing
(outstanding) extended by the financial system (Islamic and conventional, if
any)

Sectoral distribution (by economic activities) of

SharÊ’ah compliant

financing

– for example:

Amount of SharÊ’ah compliant financing extended to the manufacturing sector
(outstanding)/Amount of total SharÊ’ah compliant financing (outstanding) x 100

Ratio of total

SharÊ’ah compliant funding to overall funding and liabilities =

Amount of total SharÊ’ah compliant funding/Amount of overall funding and
liabilities in the financial system (Islamic and conventional, if any)

Ratio of PSIA to total

SharÊ’ah compliant funding = Amount of total

PSIA/Amount of total SharÊ’ah compliant funding

Number of total

banking and near-banking IIFS in a financial system

Number of resident branches per hundred thousand inhabitants

= Number

of total resident branches (of domestically incorporated IIFS and/or of foreign
controlled IIFS) for every hundred thousand inhabitants

Number of resident foreign-owned branches and/or banking subsidiaries
per hundred thousand inhabitants

= Number of total resident foreign-owned

branches and/or banking subsidiaries (of foreign-controlled IIFS) for every
hundred thousand inhabitants

Number of overseas branches and/or banking subsidiaries per hundred
thousand inhabitants in host countries

= Number of total overseas branches

and/or banking subsidiaries, located and operating abroad of domestically
incorporated IIFS (if any) for every hundred thousand inhabitants of the host
country

Encouraged SIFIs

Percentage of

SharÊ’ah compliant financing (by categories of

counterparty/institutional sectors) to total

SharÊ’ah compliant financing =

Amount of SharÊ’ah compliant financing extended to a counterparty
(outstanding)/Amount of total SharÊ’ah compliant financing (outstanding) x 100

Categories of counterparty may consist of institutional sectors as defined in the

SNA 1993 – that is, the government, financial corporations, non-financial
corporations, non-profit institutions serving households and households

Geographical distribution of

SharÊ’ah compliant financing to total SharÊ’ah

compliant financing (for exposure to country or regional risk)

– for

example:
Amount of SharÊ’ah compliant financing (outstanding) extended to country A or
region B/Amount of total SharÊ’ah compliant financing (outstanding) x 100

3(a) Resident employees-to-branches ratio

= Number of total resident

employees/Number of all resident branches (of domestically incorporated IIFS
and/or foreign-controlled IIFS)

3(b) Overseas employees-to-branches ratio

= Number of total employees

abroad/Number of total branches and/or banking subsidiaries abroad of
domestically incorporated IIFS

Ratio of executive employees to total employees

= Number of total

executive and above employees/Number of total employees

5(a)

Size of the Islamic banking segment vis-à-vis the overall financial system

(in asset terms)

= Market value of total Islamic banking assets/Market value of

total financial system assets x 100

5(b) Financing-to-GDP ratio

= Amount of total SharÊ’ah compliant financing

(outstanding) extended by the Islamic banking segment/Amount of GDP in
current prices

Size of the Islamic non-banking segment vis-à-vis the overall financial
system (in asset terms)

= Market value of total Islamic non-banking

assets/Market value of total financial system assets x 100

7(a)

Size of the Takaful segment vis-à-vis the overall financial system (in asset

terms)

= Market value of total Takaful assets/Market value of total financial

system assets x 100

7(b)

Gross contributions-to-GDP ratio = Amount of gross contributions received

by the Takaful segment/Amount of GDP in current prices

8(a)

Size of the Islamic capital market segment vis-à-vis the overall financial

system (in asset terms)

= Market value of total Islamic capital market

assets/Market value of total financial system assets x 100

8(b)

Market capitalisation-to-GDP ratio = Market capitalisation of SharÊ’ah

compliant listed equities and outstanding bonds (at market value as at end of
reference period)/Amount of GDP in current prices

II. Capital-based, asset-based, and income- and expense-based PSIFIs

The following tables set out the classifying of core and encouraged PSIFIs by

categories:

Table 4.6: List of core and encouraged PSIFIs classified by capital-based, asset-
based, and income- and expense-based categories.

CAPITAL-BASED PSIFIs

1(a) CAR (Standard formula) (Core)
1(b) CAR (Supervisory discretion formula) (Core)
2. Ratio of regulatory Tier 1 capital to total RWA (Core)
3. Ratio of CRWA to total RWA (Core)
4. Ratio of MRWA to total RWA (Encouraged)
5. Ratio of ORWA to total RWA (Encouraged)
6. Net NPF-to-capital ratio (Core)
7. ROE (Core)
8. Ratio of foreign exchange net open positions to capital (Core)
9. Ratio of commodity net open positions to capital (Core)
10. Ratio of equity net open positions to capital (Encouraged)
11. Ratio of real assets held for sales financing to capital (Encouraged)
12. Ratio of sukËk holding to capital (Encouraged)

ASSET-BASED PSIFIs

1. Percentage of each type of SharÊ’ah compliant financing contract to total financing
(Core)
2. Ratio of total SharÊ’ah compliant financing to overall financing (Core)
3. Sectoral distribution (by economic activities) of SharÊ’ah compliant financing (Core)
4. Percentage of SharÊ’ah

compliant financing (by categories of

counterparty/institutional sectors) to total SharÊ’ah compliant financing (Encouraged)
5. Geographical distribution of SharÊ’ah compliant financing (for exposure to country or
regional risk) (Encouraged)
6. Gross NPF ratio (Core)
7. Ratio of SP to total financing by type of SharÊ’ah compliant contract (Encouraged)
8. Percentage of gross NPF by type of SharÊ’ah compliant contract (Encouraged)
9. Percentage of gross NPF by economic activitY (Encouraged)
10. Coverage ratio (Encouraged)
11(a) PER and IRR-to-PSIA ratio for restricted IAH (Core)
11(b) PER and IRR-to-PSIA ratio for unrestricted IAH (Core)
12. ROA (Core)
13. Liquid asset ratio (Core)
14. Ratio of liquid assets to short-term liabilities (Core)
15. Ratio of total SharÊ’ah compliant funding to overall funding and liabilities (Core)

Capital-based PSIFIs relate to terms such as Tier 1 capital, regulatory capital, risk-

weighted assets, and total capital and reserves.

Asset-based PSIFIs relate to terms such as assets, financing and liabilities.

16. Ratio of PSIA to total SharÊ’ah compliant funding (Core)
17. Funding-to-financing ratio in aggregate (Encouraged)
18. Ratio of foreign currency-denominated financing to total SharÊ’ah compliant
financing (Encouraged)
19. Ratio of foreign currency-denominated funding (ex-shareholders’ equity) to total
SharÊ’ah compliant funding (ex-shareholders’ equity) (Encouraged)
20. Ratio of total off-balance sheet items to total assets (Encouraged)

INCOME AND EXPENSE-BASED PSIFIs

1. Financing income ratio (Core)
2. Fee-based income ratio (Core)
3. Investment income ratio (Encouraged)
4. Ratio of SharÊ’ah non-compliant income (if any) (Encouraged)
5. Return on financing (Encouraged)
6. Cost-to-income ratio (Core)
7. Percentage of income distributed to IAH out of total gross income of IIFS (%)
(Encouraged)
8(a) Average actual rate of return or profit rate to restricted IAH (Core)
8(b) Average actual rate of return or profit rate to unrestricted IAH (Core)
9. Spread between reference market rates (country-specific) and rate of return or profit
rate to IAH of comparable maturities (Encouraged)
10. Spread between average return on financing for all types of SharÊ’ah compliant
contracts and (average rate of return or profit rate to IAH as well as to SharÊ’ah
compliant savings account holders) (Encouraged)

159. In the format shown in Table 4.6, indicators are grouped into three categories –
namely, the capital-based PSIFIs, the asset-based PSIFIs, and the income- and
expense-based PSIFIs. However, this style of presentation does not capture the ten
infrastructure-related SIFIs, comprising four core and six encouraged SIFIs, which would
need to be presented as a separate category.

Relationship with FSIs

160. The IMF’s FSIs Compilation Guide has identified the prohibition of interest
(usury) and the promotion of trade as among the most commonly established SharÊ’ah
rules and principles, which would set IIFS apart from conventional financial institutions in
numerous ways. The specificities of Islamic finance – in particular, its unique profile of
financial risks – would fundamentally affect the definition of FSIs and, hence, their
compilation. For a further discussion, please refer to Box 4.3, entitled “Islamic Financial
Institutions and Financial Soundness”, in the IMF’s FSIs Compilation Guide.

161. Although Islamic accounting practices and principles are still evolving, the
Compilation Guide on PSIFIs attempts to address these specificities and link the PSIFIs
to unique accounting, reporting and prudential frameworks for IIFS. As a comparison,

Income- and expense-based PSIFIs relate to terms such as income and expenses.

the financing income ratio in this Compilation Guide is the parallel of the interest margin
concept in the FSIs.

162. Indeed, to a certain extent, each PSIFI has its equivalent in the list of FSIs for
deposit takers – in particular, in the core set. However, the PSIFIs have a number of
additional indicators on top of their equivalents in the FSIs for deposit takers, to reflect
specific features of Islamic finance, as well as to provide an insight into the structure of a
country’s IFSI in the form of core and encouraged SIFIs. The Compilation Guide
considers these structural and access indicators as crucial to support the interpretation
of PIFIs.

163. Since the PSIFIs are intended to complement the IMF’s FSIs, it is therefore
helpful to provide a table of correspondence between PSIFIs for banking and near-
banking IIFS and FSIs for deposit takers in order to distinguish either similarities or
differences between the two sets of macrostatistics.

164. In addition, for countries that compile the BIS consolidated banking data, the
Compilation Guide encourages national compilers to identify and specify PSIFIs that are
comparable to the BIS data, given the analytical benefits of comparing the two data sets
as shown in table 4.7

Table 4.7: Correspondence between PSIFIs for banking and near-banking IIFS and
FSIs for deposit takers

PSIFIs for banking and near-banking IIFS

FSIs for deposit takers

1(a) CAR (Standard) (Core)

No equivalent

1(b) CAR (Supervisory Discretion) (Core)

No equivalent

2. Ratio of regulatory Tier 1 capital to total
RWA (Core)

1. Regulatory Tier 1 capital to RWA (Core)

3. Ratio of CRWA to total RWA (Core)

No equivalent

2. Regulatory capital to RWA (Core)

4. Gross NPF ratio (Core)

3. NPLs to total gross loans (Core)

5. Net NPF-to-capital ratio (Core)

4. NPLs net of provisions to capital (Core)

6(a) PER and IRR-to-PSIA ratio for
restricted IAH

No equivalent

6(b) PER and IRR-to-PSIA ratio for
unrestricted IAH

No equivalent

7. Financing income ratio (Core)

5. Interest margin to gross income (Core)

8. Fee-based income ratio (Core)

No equivalent

9. Cost-to-income ratio (Core)

6. Non-interest expenses to gross income
(Core)

10. ROA (Core)

7. ROA (Core)

11. ROE (Core)

8. ROE (Core)

12(a) Average actual rate of return or profit
rate to restricted IAH (Core)

No equivalent

12(b)

Average actual rate of return or profit

rate to unrestricted IAH (Core)

No equivalent

13. Liquid asset ratio (Core)

9. Liquid assets to total assets (Core)

14. Ratio of liquid assets to short-term
liabilities (Core)

10. Liquid assets to short-term liabilities
(Core)

15. Ratio of foreign exchange net open
positions to capital (Core)

11. Net open position in foreign exchange to
capital (Core)

16. Ratio of commodity net open positions to
capital (Core)

No equivalent

17. Percentage of each type of SharÊ’ah
compliant financing contract to total SharÊ’ah
compliant financing (Core)

No equivalent

18. Ratio of total SharÊ’ah compliant
financing to overall financing (Core)

No equivalent

19. Sectoral distribution (by economic
activities) of SharÊ’ah compliant financing
(Core)

12. Sectoral distribution of loans to total
loans (Core)

20. Ratio of total SharÊ’ah compliant funding
to overall funding and liabilities (Core)

No equivalent

21. Ratio of PSIA to total SharÊ’ah compliant
funding (Core)

No equivalent

22. Number of total banking and near-
banking IIFS (Core)

No equivalent

23. Number of resident branches per
hundred thousand inhabitants (Core)

No equivalent

24. Number of resident foreign-owned
branches and/or banking subsidiaries per
hundred thousand inhabitants (Core)

No equivalent

25. Number of overseas branches and/or
banking subsidiaries per hundred thousand
inhabitants in host countries (Core)

No equivalent

26. Ratio of MRWA to total RWA
(Encouraged)

No equivalent

27. Ratio of ORWA to total RWA
(Encouraged)

No equivalent

28. Ratio of specific provisions to total
SharÊ’ah compliant financing (Encouraged)

No equivalent

29. Percentage of gross NPF by type of
SharÊ’ah compliant contract (Encouraged)

No equivalent

30. Percentage of gross NPF by economic
activity (Encouraged)

No equivalent

31. Coverage ratio (Enocuraged)

No equivalent

32.

Investment

income

ratio

(Encouraged) 13. Trading income to total income

(Encouraged)

33. Ratio of SharÊ’ah non-compliant income
(Encouraged)

No equivalent

34. Return on financing (Encouraged)

No equivalent

35. Percentage of income distributed to IAH
out of total gross income of IIFS
(Encouraged)

No equivalent

36. Ratio of total off-balance sheet items to
total assets (Encouraged)

No equivalent

37. Spread between reference rates
(country-specific) and rates of return or profit
rates to IAH of comparable maturities

No equivalent

(Encouraged)
38. Spread between average return on
financing and average rate of return or profit
rate to IAH, as well as to SharÊ’ah compliant
savings account holders (Encouraged)

14. Spread between reference lending and
deposit rates (Encouraged)

39. Funding-to-financing ratio in aggregate
(Encouraged)

15. Customer deposits to total (non-
interbank) loans (Encouraged)

40. Ratio of equity net open positions to
capital (Encouraged)

16. Net open position in equities to capital
(Encouraged)

41. Ratio of real assets held for sales
financing to capital (Encouraged)

No equivalent

42. Ratio of foreign currency-denominated
financing to total SharÊ’ah compliant
financing (Encouraged)

17. Foreign currency-denominated loans to
total loans (Encouraged)

43. Ratio of foreign currency-denominated
funding (e-shareholders’ equity) to total
SharÊ’ah compliant funding (ex-shareholders’
equity) (Encouraged)

18. Foreign currency-denominated liabilities
to total liabilities (Encouraged)

44. Ratio of sukËk holding to capital
(Encouraged)

No equivalent

45(a) Resident employees-to-branches ratio
(of domestically incorporated IIFS and/or
foreign-controlled IIFS) (Encouraged)

No equivalent

45(b) Overseas employees-to-branches ratio
(of domestically incorporated IIFS)
(Encouraged)

No equivalent

46. Percentage of SharÊ’ah compliant
financing (by categories of
counterparty/institutional sector) to total
SharÊ’ah compliant financing (Encouraged)

No equivalent

47. Geographical distribution of SharÊ’ah
compliant financing (Encouraged)

19. Geographical distribution of loans to total
loans (Encouraged)

48. Ratio of executive employees to total
employees (Encouraged)

No equivalent

49(a) Size of the Islamic banking segment
vis-à-vis the overall financial system (in
asset terms) (Encouraged)

No equivalent

49(b) Financing-to-GDP ratio (Encouraged)

No equivalent

50. Size of the Islamic non-banking segment
vis-à-vis the overall financial system (in
asset terms) (Encouraged)

No equivalent

51(a) Size of the Takaful segment vis-à-vis
the overall financial system (in asset terms)
(Encouraged)

No equivalent

51(b) Gross contributions-to-GDP ratio
(Encouraged)

No equivalent

52(a) Size of the Islamic capital market vis-
à-vis the overall financial system (in asset
terms) (Encouraged)

No equivalent

52(b) Market capitalisation-to-GDP ratio No

equivalent

(Encouraged)
No equivalent

20. Capital to assets (Encouraged)

No equivalent

21. Large exposures to capital (Encouraged)

equivalent

22. Gross asset position in financial
derivatives to capital (Encouraged)

equivalent

23. Gross liability position in financial
derivatives to capital (Encouraged)

equivalent

24. Personnel expenses to non-interest
expenses (Encouraged)

No equivalent

25. Spread between highest and lowest
interbank rates

Extent and limitations of PSIFIs

165. The Compilation Guide has identified several possible lconstraints on the
selection and use of PSIFIs. Unavailability or limited availability of underlying data might
limit the compilation of the proposed PSIFIs. In some circumstances, data may be
available but be constrained by the irregularity, or even discontinuation, of the
compilation of the relevant data series.

166. Variations in compilation and dissemination practices across countries due to
differing prudential, regulatory, accounting and auditing, and statistical standards could
result in differing definitions of underlying data, hence limiting the benefits of
international comparability.

4.3

COMPILATION AND DISSEMINATION OF PIFS AND PSIFIs

167. The Compilation Guide encourages the relevant national supervisory authorities
to compile and disseminate, as well as transmit to the IFSB, the PSIFIs – in particular,
the core set – on a quarterly basis. Indeed, the core set of PSIFIs is the priority
established by the Compilation Guide with the aim of assisting the assessment and
surveillance of the strengths and vulnerabilities of the IFSI. As a by-product of such a
compilation and dissemination exercise at the national level, national compilers are
encouraged to transmit both PSIFIs and their underlying data series to the IFSB.

168. As far as consolidation method is concerned, the Compilation Guide stipulates
compilation of PIFS on a domestically controlled, cross-border consolidated basis,
although a separate compilation on a domestically consolidated basis can be undertaken
if data compiled based on such a method are deemed necessary for analytical purposes.

169. The rule of thumb is to ensure consistency in the approach of compiling and
disseminating different PSIFIs (and their underlying data), while striving to make it as
consistent as possible with the approach employed to compile and disseminate FSIs for
the financial system as a whole.

Compilation of PIFS and PSIFIs

170. The availability of underlying data from which the PSIFIs are derived may vary
depending upon national circumstances. The Compilation Guide recommends reporting
and organising the underlying data of the PSIFIs on an aggregated basis at the sector
level, but on a consolidated basis at the group level.

Availability of underlying data series

171. It is likely that not all the underlying data series specified in the Compilation
Guide will be readily available as some may not be collected at all, while others may not
meet the proposed definitions. As such, the underlying data used to calculate some
PSIFIs are available more frequently than others.

172. In the event that data series specified in the Compilation Guide are not currently
compiled, national compilers may resort to data that most closely fit the definitions and
principles as prescribed in the Compilation Guide. In such a situation, any deviations for
each underlying data series must be understood and well documented. Unavailability of
data series for the numerator and denominator of a PSIFI within the same periodicity
may limit the frequency of compilation of the PSIFI.

173. In the Survey on Compilation and Dissemination Practices of Islamic Finance
Statistics, the average number of data currently compiled by respondents is 31 – that is,
almost 60% of the total data enumerated in the Survey. The rather broad availability of
data is an indication that it would not be too burdensome for central banks/monetary
authorities and other relevant supervisory authorities, at least among IFSB members, to
compile the PIFS for the purpose of calculating the PSIFIs.

II. Aggregation and consolidation for the purpose of PIFS and PSIFI

compilation

174. The Compilation Guide recommends compilation of PIFS, particularly the
underlying data series, on a consolidated basis and/or on an aggregated basis (where
applicable – in particular, at the sector level) to support soundness and stability analysis
at the group, sub-sector, sector and country levels, as follows:

(a) At the group level – that is, consolidated group reporting, which

entails

consolidation of activities of subsidiaries and branches with

those of the

parent IIFS.
(b) At the sub-sector level – that is, cross-sub-sector consolidated,

which

involves elimination of all flows and positions between institutional

units

within the boundary of institutional units in the sub-sector, while those with
institutional units outside of the sub-

sector are retained.

(c) At the sector level – that is, sectoral aggregation, which involves
summation of positions and flow data across all reporting units within a
particular group, and cross-sector consolidated, which involves elimination of

all flows and positions between institutional units within the boundary of the
sector, together with some possible consolidation adjustments.

A. Compilation of group-level underlying data

175. At the group level, the Compilation Guide recommends consolidated group
reporting for each IIFS group while leaving national compilers some degree of flexibility
to consider among the following consolidation methods:

(a) consolidation of data only of resident subsidiaries and branches, which

corresponds to the domestically consolidated method further discussed
below;

(b) consolidation of data of both resident and overseas subsidiaries and

branches, which corresponds to the cross-border consolidated method,
the preferred method for monitoring the financial soundness of
internationally active IIFS, as further discussed below; and

banking and near-banking IIFS, which could give rise to a consolidation
issue in the case where IIFS groups have conventional banking
subsidiaries or if conventional financial groups have Islamic windows or
Islamic banking subsidiaries.

176. Each consolidated group reporting approach has its own sector-level reporting
population. For instance, if data from overseas subsidiaries and branches of a
domestically incorporated IIFS were included in the consolidated group, then the
reporting population at the sector level under this approach would be larger than if they
were not.

177. Although the Compilation Guide enumerates several options for compiling the
underlying data of PSIFIs based on a consolidation approach (please refer to Chapter 7,
Section 7.3 for elaboration), it prefers to focus discussion on the two main methods of
consolidation:

(a)

the domestically consolidated or national residency consolidation basis,
which entails consolidation of flows and positions between resident
headquarters, subsidiaries and/or branches of domestically incorporated
parent IIFS

and resident subsidiaries and/or branches of foreign parent

IIFS

; and

(b)

the domestically controlled, cross-border consolidated basis, which entails
consolidation of flows and positions of domestically controlled and
incorporated parent IIFS

between their resident headquarters,

subsidiaries and/or branches and their overseas subsidiaries and/or
branches.

178. For financial soundness analysis, the Compilation Guide requires the compilation
on a cross-border consolidated basis, covering domestic and international operations of
domestically controlled and incorporated parent IIFS, a concept similar to the
recommendations stipulated for the IMF’s FSIs and consistent with the BIS’ method for
consolidated international banking statistics. Data compiled according to this method can
then be disaggregated into separate segments by nationality of the parent IIFS – that is,

for domestically controlled and incorporated IIFS, and for resident subsidiaries and/or
branches of foreign IIFS – to further assess the soundness of foreign IIFS in the country.

179. The domestically consolidated method, which is consistent with the BIS’ method
in locational international banking statistics, can be considered if it is deemed important
for a better understanding of linkages between financial soundness and macroeconomic
developments – in particular, interrelationships with other macrostatistics – as well as for
enhanced cross-country comparability.

180. Although the domestically controlled, cross-border consolidated method is
required by the Compilation Guide, the domestically consolidated method is useful for
some analytical purposes. As a general rule, the method chosen for compiling the FSIs
of the broader financial system can also be used for compiling the PSIFIs.

181. In any case, the Compilation Guide requires the choice of consolidation method
for compiling the underlying data series to be specified. Regardless of the consolidation
method used, application of highly consistent accounting and reporting rules, principles
and frameworks across all data sets is vital for a meaningful analysis.

B. Compilation of sector-level underlying data

182. Assuming underlying data have been consolidated at the group level, the
process of compiling sector-level data involves two steps, namely:

a) aggregation of data reported by IIFS belonging to the same sub-sector

or sector; and
b) further sector-level adjustments (consolidations) to eliminate double

counting of capital and income among the reporting population before

arriving at final sector-level data.

183. However, if data are not reported on a consolidated group basis, additional
adjustments are required to eliminate intra-group flows and positions. In compiling
sector-level data and as part of the two-step process, it is important to take note of the
possible variety in the range of IIFS belonging to one particular sector across countries,
depending on the consolidated group reporting approach adopted.

184. Some adjustments are required to avoid double counting of capital and assets,
and overstatement of specific income and expense items when data from individual IIFS
are aggregated to arrive at the information for an entire sector, with the purpose of
preventing an exaggeration of their financial health and capital strength. The total data
for the sector could be disaggregated by column to gain greater understanding of the
relationships with subsidiaries, associates and other IIFS.

185. Based on the IMF’s FSIs Compilation Guide, there are up to seven adjustments
required to the sectoral income statement to eliminate intra-sector transactions and
gains and losses from intra-sector claims, as well as three adjustments to the sectoral
balance sheet data, primarily to avoid the double counting (double leveraging) of capital
at the sector level. The relevance of each adjustment will depend on country
circumstances.

186. To avoid double counting of an IIFS’ capital and reserves for the entire sector,
equity investments in other IIFS need to be excluded. As such, for equity investments in
banking subsidiaries and associates (and for reverse equity investments), the value of
their propotional share in the capital and reserves needs to be clearly identified and
separated.

187. To avoid overstatement of specific sub-totals in the income and expense
statement, some income series are required. Fees and commissions, and any other non-
financing-related income earned by an IIFS from another IIFS, will increase both the
non-financing-related income and expense items, despite having no impact on net
income; hence, they will need to be excluded from the sector totals for gross income and
non-financing expenses.

188. Since including dividend income in the non-financing income may affect gross
and net income for the sector, it is recommended to eliminate such income from equity
investment from gross income, and from dividends payable. The proportionate share of
retained earnings from associates and subsidiaries (and from reverse equity
investments) should also be excluded from non-financing income and from retained
earnings for the entire sector. Since a gain or loss on a sale of fixed assets to another
IIFS is not equivalent to a gain or loss for the sector as a whole, it is deducted from
sector-wide income.

189. In summary, intra-sector equity investments are deducted from the overall capital
of the sector to avoid double counting of capital and reserves held within the sector.
Neither gains and/or losses from intra-sector claims nor intra-sector transactions should
affect the sector’s net income or capital and reserves – that is, value is added or lost
through IIFS transactions with and claims on entities that are outside, not inside, the
sector.

190. In the income and expense statement, intra-sector non-financing income and
expense is eliminated; and intra-sector dividends are excluded from both the non-
financing income and dividend payable lines. Adjustments are also made for any
provisions on NPF claims on other IIFS in the reporting population. Intra-sector short-
term liabilities are also eliminated.

191. The reporting population could be specified in order to create group-wide data on
a peer group basis. For PIFS compilation by peer group, national compilers have to
decide whether peer groups constructed represent sub-groups of the total reporting
population of IIFS – that is, data are a peer group’s contribution to the total for the
population; or whether the compilation is on a stand-alone basis – that is, the peer group
is self-contained, whereby IIFS outside the group are treated as entirely external to the
group. The stand-alone basis is likely to require less additional data than the sub-group
approach.

Dissemination of PSIFIs

192. Countries are encouraged to disseminate the PSIFIs and other relevant data on
a frequent and timely basis, and for the shortest period possible, to enhance the
transparency of their financial system and to allow early detection of signs of

vulnerability. Thus, PSIFIs can potentially complement the use of early warning systems
and contribute to crisis prevention.

193. The Compilation Guide intends to provide a standard guideline on how to
disseminate PSIFIs while allowing some adjustments in order to respect specific country
circumstances. Dissemination of information, in addition to the specified PSIFIs, could
prove very useful in assisting users, mostly analysts, to interpret the PSIFIs and to
undertake a comprehensive analysis of the strength and vulnerability of a financial
system.

194. National compilers should consider aiming to disseminate on a quarterly basis at
least the core set of PSIFIs, central to an analysis of the soundness of an IFSI, instead
of the full range of PSIFIs. Taking into consideration current practices, where IIFS submit
data to central banks/monetary authorities within a month of the reference date, while
allowing a grace period of another month, [OK as edited?] the Compilation Guide
encourages dissemination by a national “lead agency” – in most cases, the central
bank/monetary authority of a jurisdiction – by means of a single centralised website
within, at most, one quarter after the reference date.

195. Dissemination of core PSIFIs on a quarterly basis should allow new
developments to be identified at an early stage and provide time-series that can be used
in concert with other key macrostatistics. The Compilation Guide also acknowledges that
dissemination of encouraged PSIFIs depends a great deal on country circumstances.
Nonetheless, in the initial stage, national compilers may consider complete
dissemination of all PSIFIs on an annual basis, as specified in the Compilation Guide.

196. The website release of PSIFIs and related data should enable simultaneous and
far-reaching accessibility to information by all potential users while enhancing
transparency. National compilers may also consider regular statistical publications as a
medium to disseminate PSIFIs.

197. Whether in the form of time-series data and/or graphical representations, the rule
of thumb is for information to be disseminated in a consistent and coherent manner. The
Compilation Guide also encourages transmission of PIFS, which comprise PSIFIs and
their underlying data series, to the IFSB within one quarter after the reference date.

198. Dissemination-related decisions may have implications for a number of
compilation issues. National compilers will have to consider the following factors for their
dissemination policy, namely:

(d) periodicity;
(e) range of data to be disseminated;
(f) timeliness of data release; and
(g) format of release.

199. The Compilation Guide recommends the dissemination of PSIFIs to be
accompanied by the provision of metadata (information about data), such as the content
and coverage of each PSIFI as well as its accounting principles and other national
guidelines, to assist users in understanding the methodology and interpreting the PSIFIs
while enhancing transparency of their calculations.

200. Dissemination of other indicators that provide a broader picture of economic and
financial circumstances, such as financing growth, GDP growth, inflation, the external
position, the institutional and regulatory framework, etc., of a country, could also be
considered.

CHAPTER 5: ACCOUNTING AND REPORTING PRINCIPLES

201. The underlying accounting and reporting principles of the parent banks, both
conventional and Islamic, will have implications for data submission to central
banks/monetary authorities. The Compilation Guide attempts to highlight the importance
of integration of reporting and disclosure practices by adopting common accounting and
reporting principles that are consistent across countries. This approach shall enable
fundamental characteristics of economic transactions and coherent accounting principles
to be captured in the PSIFI compilation and dissemination frameworks.

202. In essence, the unique features of IIFS that have an impact on accounting and
reporting principles are substantially the result of SharÊ’ah rules and principles that
govern the contractual relationships between IIFS and their fund providers – in
particular, IAH as well as parties that obtain financing from IIFS.

203. This chapter provides guidance on accounting and reporting principles
recommended by the Compilation Guide for the purpose of PIFS collection and
compilation. It draws on existing internationally accepted prudential, accounting,
reporting and statistical standards.

204. In view of the lack of adherence to a common set of standards across countries
for Islamic finance, the Compilation Guide encourages national compilers to disclose the
basis of accounting used to compile the PIFS, as well as any assumptions made and
SharÊ’ah rules and principles involved in contractual conditions.

5.1

UNDERLYING ACCOUNTING PRINCIPLES FOR PSIFIs

205. To compile both position and flow data for use in calculating the PSIFIs, a
consistent set of accounting principles is required. This chapter provides guidance on
the accounting principles that could be employed, taking into account the analytical
benefits of the PSIFIs and drawing on existing international standards. These standards
include the System of National Accounts, 1993 (SNA, 1993); International Financial
Reporting Standards (IFRS); US Generally Accepted Accounting Principles (US GAAP);
UK Generally Accepted Accounting Principles (UK GAAP); Accounting and Auditing
Organization for Islamic Financial institutions (AAOIFI) standards; national accounting
standards; Basel Committee on Banking Supervision (BCBS) or BASEL standards; and
International Financial Services Board (IFSB) standards.

206. The prevalent adoption of these standards in practice is presumed, although
there is no full-fledged adherence by all countries. In disseminating any information,
countries are encouraged to disclose the basis of accounting used to compile the
underlying data series of PSIFIs, along with any critical assumptions made.

Brief definitions of flows and positions relevant to IIFS

For example, PSIAs, which resemble conventional time deposits to a certain extent, are generally structured based on

the

Mudarabah

contract. However, Islamic financings, unlike conventional loans and advances, are structured based on a

variety of

Shari’ah

compliant contract types, such as

Murabahah

Bay’ Muajjal

for sales-based financing and

Ijarah

and

Ijarah Muntahia Bittamleek

for lease-based financing.

207. In the Compilation Guide, flow data of IIFS include SharÊ’ah compliant
transactions in goods, services, income, transfers, non-financial and financial assets;
holding gains and losses arising from price or exchange rate movements; and other
changes in the volume of assets, such as losses from extraordinary events.

208. Under certain circumstances, potential costs can also be included. Position data
represent the value of outstanding stocks of non-financial and financial assets; plus the
value of different types and forms of contracts of funding, including equities of IAH or
PSIA holders as well as liabilities. For further discussion, see Chapter 7, Section 7.1.

Basis of recognition of flows and positions of IIFS

209. The basis of recognition of flows and positions of IIFS takes into consideration
periodic recognition, ownership and control, measurable economic value by forms of
transactions, income recognition by forms of transactions and distribution based on
profit-sharing.

I. Periodic

recognition

210. The Compilation Guide recommends that flows and positions be recorded using
the accrual basis of accounting. On this basis, flows are recognised when economic
value is created, transformed, exchanged, transferred or extinguished in a legitimate
manner in accordance with SharÊ’ah approved requirements.

211. Accrual basis provides timely matching of flows, as well as timely assessment of
the economic consequences of such flows on the financial health and soundness of the
reporting entities regardless of whether cash has been exchanged.

212. In general, accrual basis is the preferred basis of recognition of revenues and
gains, as well as expenses and losses. In cases where IIFS adopt the cash basis,
disclosure of such adoption should be made.

213. Although accrual basis is adopted as a general principle, its application may vary
according to contract types. For example, in the case of Murabahah financing, a mark-up
profit is determined at the point of contracting.

As such, unlike interest on conventional

loans and advances, accrual of profit in a Murabahah financing does not continue
indefinitely but is limited to the actual amount of pre-agreed profit.

II. Ownership

214. Reporting of the existence of assets, equities of IAH and liabilities is determined
by the principles of ownership and control.

In this respect, juristic conditions pertaining

to complete rights of ownership in the form of property and usufruct according to the
various forms of contracts adopted.

AAOIFI FAS No. 2 on

Murabahah

financing requires the mark-up profit to be reported as deferred profit, which has an

agreed profit limit.

AAOIFI Statements of Financial Accounting No. 2 specifically defines assets to be reported if there is complete

ownership in terms of rights of possession, use and disposal.

215. As discussed in Chapter 2, Section 2.2, on the funding side, PSIA based on
MuÌÉrabah principles or other profit-sharing modes are treated as equity with risk-sharing
or risk-bearing exposures, as opposed to liabilities-like treatment for non-PS deposits.
On the assets side, SharÊ’ah compliant modes for financing activities may take the form
of equity claim contracts (MuÌÉrabah and MushÉrakah ), sales-based contracts
(Murabahah, Bay’ Muajjal, Salam, etc.), lease-based contracts (IjÉrah and IjÉrah
Muntahia Bittamleek) and contracts to produce/manufacture (IstisnÉ´a), among others.

216. However, assets reported in the financial statements are not limited to
receivables and investments in financial assets. Non-financial MuÌÉrabah assets, as well
as assets purchased for Murabahah financing, could be reported in the form of inventory
to be sold or transferred to the customers who obtain such financing.

III. Measurable economic value by forms of transactions

217. Estimation of the value of assets is based on the probable future economic
benefits of those assets (such as sale) or the probable rendering of their services (such
as lease) in the form of prospective cash flows that accrue to the reporting entity. The
perceived economic benefits of an asset shall be reported to be consistent with the
contractual rights and obligations of transactions involving the asset that represents the
legal form based on the principle of ownership. As such, recognition of assets in the
balance sheet requires the assets to have perceived measurable economic value as well
as to be owned by the entity.

218. As an illustration, most IIFS differentiate three categories of transactions or
financing contracts – namely, sales financing, lease financing and equity financing.
Sales-type financing allows receivables arising from completed sale transactions to be
reported as assets in the balance sheet of IIFS. Purchased goods on behalf of
customers will then be sold and reported in the customers’ balance sheet. Lease-type
transactions involve provision of services of the assets to customers while IIFS retain the
right of ownership and disposal of the lease assets. Although economic benefits
ultimately accrue to the lessee, the lease assets are reported in the IIFS’ books. Equity
right of claim contracts in the form of MuÌÉrabah or MushÉrakah refers to the right of
ownership of the assets. Such claims are reported as equity financing or investment,
since IIFS have the right of claim on capital recovery as well as return arising from the
performance of the assets.

219. Acquisition date of the asset or services of the asset refers to the date of change
of ownership as specified by the contractual conditions. In the case of the sale of asset,
the seller derecognises the non-financial asset and will report it either as a financial
claim for sale on credit, or as cash received for complete settlement. At the same time,
the buyer recognises the asset on purchase where effective transfer of risks and
rewards has occurred. In the case of services rendered or dividend declared, the income
or dividend accrues and the resulting financial claim is extinguished upon payment.

220. A clear distinction is made between effective transfer of risks and rewards upon
sale of an asset (e.g. property) and incidental transfer of beneficial use of an asset (e.g.
usufruct) in SharÊ’ah compliant transactions. Incidental transfer of risks and rewards that
may arise in the case of lease financing, where economic benefits accrue to the lessee,

is significant as a criterion for reporting lease financing assets in the lessee’s
books.Effective transfer of risks and rewards does not arise in IjÉrah -type financing,
as the ownership and reporting of the assets resides with the lessor even in the case of
lease with an agreed transfer of assets to the lessee, more commonly known as IjÉrah
Muntahia Bittamleek. In fact, an IIFS shall report the lease asset, and record the lease
payment as revenue, until the asset is transferred by sale or other forms of disposal,
unlike in conventional finance where the financial institution shall report it as a lessor’s
receivable.

IV. Income recognition by forms of transactions

217. The Compilation Guide recommends financing costs to accrue continuously on
financial instruments, matching the cost of funds with the provision of funds and
increasing the principal amount outstanding until the financing cost is paid. The
preference is that financing cost should accrue at the effective yield agreed at the time
of issuance of the financial instrument

. The effective yield is based on the agreed

price or profit rate at the time of contract.

218. In a sales-based type of financing such as Murabahah (cost plus mark-up
financing), Bay’ Muajjal (deferred payment financing/sale) and Salam (pre-paid
purchase), a price ceiling or mark-up is agreed at the time of contract.

219. In the case of Murabahah, the mark-up is made known to customers. Upon
completion of the sale, the mark-up does not increase and is considered as the ceiling
price. Any profit rate derived from the mark-up profit shall not accrue beyond the total
amount of agreed profit.

220. Effective yield or revenue of lease-type financing such as IjÉrah does not result
from a sale of assets but, rather, from rendering the services of the assets. In these
cases, there is no restriction as to the price ceiling or mark-up, while both IIFS and their
customers have the flexibility to agree on periodic rates that vary with the services
rendered to customers.

221. For a fixed-rate instrument, the effective yield is the financing rate that equates
the discounted value of future payments to the issue price. This can be illustrated with a
sales-based type of financing, such as Murabahah and Bay’ Muajjal contracts.

222. While

Murabahah financing involves disclosure of costs with a pre-determined

and fixed mark-up for a customised purchase, Bay’ Muajjal is based on a negotiated
price of available commodities for a deferred payment. Murabahah corresponds to a
contract of trust, which requires the cost of purchase to be made known to the ultimate
buyer in respect of the customised order. However, both contracts may involve either
instalments or a lump sum payment in the financing arrangement.

223. For variable-rate instruments, the yield will vary over time in line with the terms of
the contract. This can be illustrated with a lease-based type of financing, such as IjÉrah
and IjÉrah Muntahia Biltamleek contracts. When such an instrument is traded, the
effective yield at the time of acquisition of such instrument is recognised.

224. Nonetheless, there may be restrictions on trading for sales-based financial
instruments such as Murabahah and Bay’ Muajjal contracts, which may differ across
jurisdictions according to their juristic opinions on the permissibility of Bay’ Dayn
contracts. Bay’ Dayn is trading of debt or receivables arising from trade credit such as
Bay’ Murabahah or Bay’ Muajjal. Views regarding Bay’ Dayn vary across jurisdictions.
The permissibility of Bay’ Dayn is limited to a small number of jurisdictions, partly for the
purpose of meeting the liquidity needs of issuers and investors.

225. For financial instruments that are designed based on equity modes, such as
MuÌÉrabah and MushÉrakah , an expected yield with a contracted profit-sharing ratio is
agreed upon issuance. Contractual conditions of the instruments at the time of issuance
shall ascertain modes of capital recovery and realised returns to be distributed to
investors. However, returns arising from market valuation of financial claims shall be
determined as at the valuation date. Income realised or realisable in the form of returns
shall be recorded on an accrual basis.

V. Distribution based on profit-sharing

217. Unlike conventional fixed deposits which are treated as liabilities, PSIA are
treated as equity-equivalent accounts, whereby PSIA holders or IAH share in the profits
of funded assets (which commingle with shareholders’ equity in the case of unrestricted
PSIA) and assume the risk of possible loss of their contribution (as they bear all
investment losses).

218. An explicit and contracted profit-sharing ratio is agreed upon between IAH and
IIFS for a pre-determined period of time. Without a contracted fixed-deposit interest rate
as funding cost for IIFS, accruing returns attributable to IAH during the period of
investment involves monthly estimations and appropriate adjustments of PER, set aside
from profits before distribution to IAH – that is, before deducting the share of IIFS in
order to smooth the returns paid to IAH on an agreed profit-sharing ratio.

219. Monthly return is declared by the management as accrued to IAH on a periodic
basis for investment horizons exceeding one month. Such accrual could be adjusted at
the time of the actual (realised) return through cash payout to enable smoothing and
adjustments of returns among classes of IAH, as well as deposits of varying maturities.

220. To mitigate exposure to potential loss on investment, which will be borne solely
by IAH, an IRR is set aside from net income attributable to IAH based on an agreed
profit-sharing ratio. Practices in some countries at present do not provide for PER and/or
IRR. In such a situation, equity holders of an IIFS will have to tap their own income – for
example, by foregoing part of their share of profits – in order to smooth or adjust the
returns to IAH. This represents the “displaced commercial risk” borne by the IIFS.

221. In determining distributable income to IAH, international accounting standards

and best practices have identified two broad categories of income distribution – namely,
the Separate Investment Account Method and the Pooling Method.

AAOIFI FAS No. 5 and FAS No. 6.

222. The

Separate Investment Account Method

distinguishes between income

arising from jointly funded assets involving unrestricted PSIA and that from non-jointly
funded assets. Direct expenses incurred in the extension of financing, as well as other
financing-related costs such as provisions or allowances for bad and doubtful financing,
impairment losses, and any other direct relevant provisions that are associated with
jointly funded assets, are deducted to determine gross income to be distributed between
IAH and the IIFS. Net income distributable to shareholders and other fund providers is
determined after deducting other expenses. PER is deducted proportionately based on a
profit-sharing ratio from income distributable to IAH and the IIFS.

Based on the agreed

profit-sharing ratio from income distributable between IAH and IIFS, the jointly funded
distributable gross income is allocated to determine the profit rate to IAH and gross profit
rate to shareholders.

223. The

Pooling Method,

which combines all expenses arising from all types of

assets funded by a pool of funds, recognises all direct and indirect financing and non-
financing-related expenses, including operating costs for deduction from the gross
income. A proportion of the net income is set aside as PER, before distributing the
income according to a profit-sharing ratio pre-agreed between IAH and IIFS. Whichever
method is adopted, consistent policy in income distribution should be adhered to and be
disclosed accordingly to facilitate comparison.

224. For example, one-month IAH, three-month IAH and six-month IAH may have the
same end-period of investment horizon. In other words, a six-month moving average of
monthly returns to IAH could be estimated and declared over the period on a monthly
basis. Upon completion of the term, the return payout will be paid based on the
estimated average declared after the allocation is made to the PER. In general, a longer
investment horizon is associated with a higher return. A higher or lower return payout is
possible, depending on the level of PER to be maintained.

225. Financing expenses (income) that accrue during the reporting period shall be
recorded as an expense (income) in that period. Financing income attributable to IAH is
a form of dividend payout, to be accrued during the reporting period and recorded as
distribution. For position data, there are three possible measurements:

(a)

financing expenses, that accrue and paid, the position remains

unchanged.

(b)

financing expenses, that accrue but are payable only at a later

date, the position increases based on the reporting period

(c)

financing expenses, that accrue but not paid, the position increases

by the amount due.

226. In the case of (c), appropriate classifications of provisions for doubtful financing
collection are determined prior to arriving at distributable income to IAH. In the case of
income related to non-performing financing, provisions for doubtful financing are
identified and adjusted as income-in-suspense.

227. The Compilation Guide recommends all financing expenses that have accrued
but are not yet payable be included as part of the value of the underlying instruments.
For bonds or sukËk issued at a discount or on a zero-coupon basis, the difference
between the issue price and the value of maturity is treated as a financing expense, and

Some IIFS also include direct operating cost for deduction from the gross income.

is recorded as accruing over the life of the bond or sukËk. As calculated financing income
exceeds any coupon payments for these instruments, the difference is included in the
outstanding principal amount of the asset. For instruments issued at a premium, coupon
payments will exceed calculated income, with the difference reducing the principal
amount outstanding.

Arrears

228. Arrears are created when financing amount or charges are not made when due.
Arrears remain outstanding until they are repaid, rescheduled or forgiven by the creditor.
Such arrears on financing charges may be categorised as a non-performing income and
classified as income-in-suspense.

229. If arrears are guaranteed based on a Kafalah

contract by a third party and such

guarantee is exercised, then such arrears are extinguished as though they are repaid.
Arrears are transferred to a guarantor as a form of short-term debt liability obligation.

Contingencies

230. Contractual financial arrangements between institutional units give rise to
conditional requirements either to make payments or to provide items of economic value.
In this context, “conditional” means that the claim only becomes effective if a stipulated
condition or conditions arise. These are referred to as contingent items and are not
recognised as financial assets (liabilities) in the Compilation Guide since they are not
actual claims but represent exposures to potential risks.

231. In the case of an ordered purchase to the purchase orderer such as Murabahah,
whereby, on behalf of a customer, an IIFS purchases an object that the customer is
obliged to take delivery of, the non-financial asset is subject to market valuation and the
IIFS is subject to the market risk

of the object.

232. Data on types of contingent arrangements on the basis of maximum potential
exposures that could be collected include finance-related payment guarantees, letters of
credit, line of credit and credit commitments (including notes issuance facilities, revolving
underwriting facilities, and other options or notes facilities) and potential costs (if not
measurable and treated as an expense in the income statement) incurred to be
recognised and determined.

5.2 VALUATION

233. The preferred valuation method shall reflect the most realistic assessment at any
moment in time of the value of an instrument or item. The choice of valuation approach
depends on the availability of markets that allow reliable measurement of value.

Kafalah

is a contract of guarantee or suretyship adopted in letter of credit, insurance or any other form of guarantee

relating to

Shari’ah

approved products and services.

According to AAOIFI FAS No. 2 on

Murabahah

financing.

234. Tradable instruments should be valued at market or fair value. For non-tradable
instruments, nominal value is acknowledged with appropriate provisions that provide
realistic assessment of value.

Valuation of transactions

235. Transactions are generally valued at actual prices as agreed by the transacting
parties. Market price equivalents will be considered when no actual market price exists
or value is not reflective of the prevailing market value.

Valuation of positions

236. The market value of an asset or liability on the balance sheet is a measure of
what the financial and non-financial asset or liability is worth in the market at the
reference date of the balance sheet. Traded instruments should be valued at market
prices as at the reference date to which the positions relate.

237. Untraded or non-tradable instruments can be valued using different approaches.
The preferred approach is to estimate the present value of the instrument based on an
appropriate market rate of return as the discount rate.

In the case of non-tradable

financing instruments such as Murabahah and Bay’ Muajjal contracts, recording nominal
value with appropriate provisioning is allowed.

238. The value of a share and other equity investments in an associate and
unconsolidated subsidiary is equal to the investor’s proportionate share, in terms of
ownership of the equity capital, of the value of the capital and the reserves of the
associate/subsidiary.

239. Valuation approaches for PSIA or funds of IAH vary with the type of restricted or
unrestricted PSIA. In the case of unrestricted PSIA reported in the balance sheet, the
value of the funds includes the nominal value of the underlying assets, as well as the
PER and IRR set aside to distribute potential future dividends to IAH. In the case of
restricted PSIA reported in a separate statement, and usually on an off-balance sheet,
the value is appropriately measured as the net asset value of investments. The separate
statement for restricted IAH is prepared with detailed presentation and disclosure of fund
movements, investment horizon, maturity profiles, and movements of PER and IRR.

In essence, market valuation takes into consideration market conditions in choosing an appropriate discount rate. This

may differ from the market interest rate adopted in conventional valuation principles.

CHAPTER 6: ACCOUNTING AND REPORTING FRAMEWORKS; SECTORAL
FINANCIAL STATEMENTS AND MEMORANDUM SERIES

240. Sufficiently detailed and reliable information provided by the financial statements
of IIFS is essential to evaluate the financial conditions of IIFS. The elements of the
balance sheet and the income statement would be used to calculate the PSIFIs. This
chapter provides an outline of the accounting framework for IIIFS, as well as sectoral
IIFS financial statements, including definition of the line item series required to calculate
the PSIFIs. The framework is drawn from relevant international accounting standards

and prudential standards.

It complements Chapter 5 of the Compilation Guide.

241. Where reporting differences arise between countries that adopt different
accounting systems and their relevant definitions, the Compilation Guide recommends
that national compilers rely on uniformly defined supervisory-based data, in addition to
data sourced from financial statements, to enhance the process of compiling and
monitoring the PSIFIs. Due to the varying degree of reporting and accounting differences
and the flexibility in compiling such data, this Compilation Guide adopts an approach
similar to the IMF’s FSIs Compilation Guide, by emphasising the importance of
disseminating metadata (information about data) that should allow comparability of
different types of compiled data.

242. The rationale for providing sectoral accounts, as well as detailed definitions, can
be attributed to three reasons. First, such an approach will facilitate data compilation at
the national level. Second, with the formulation and acceptance of a consistent
framework based on international accounting and prudential standards while meeting
analytical needs, the framework provides a benchmark for national compilers when
disseminating metadata. Finally, it should allow for enhanced comparability of cross-
country data.

6.1

ACCOUNTING AND REPORTING FRAMEWORKS

243. For the purpose of compilation and formulation of PSIFIs, the key components of
the accounting and reporting framework, which is drawn from relevant international
accounting standards and prudential standards, are:

a) sectoral financial statements, which may include the income statement,

balance sheet and statement of restricted investments; and

b) memorandum series, which may include supervisory series, and series

for income statement analysis and balance sheet analysis.

Income Statement

244. The main elements of an income statement are revenue or income, gains,
losses, return on PSIA and expenses.

Revenue or income

245. Revenue or income refers to a gross increase in assets or a decrease in
liabilities, or a combination of both, during the period covered by the income statement,

International accounting standards include relevant IFRS such as the IFRS 7 and AAOIFI Standards.

International prudential standards include Basel II and IFSB standards.

which results from “legitimate” activities from the SharÊ’ah point of view, such as
financing, investment, trading, rendering of services and other profit-oriented activities,
which may include the management of restricted investment accounts of the IIFS.

246. Additional characteristics of revenue or income are that such increase in assets
or decrease in liabilities should not result from investment or withdrawal by shareholders
or unrestricted IAH or non-IAH depositors such as current account holders, or the
disposal of assets. Such gross increases in assets or decreases in liabilities have the
same characteristics of assets or liabilities, respectively, and relate to the reporting
period.

247. Revenue or income could arise from the mobilisation of funds and can take the
form of income from financing and/or investment activities, as well as in the form of fees
from services rendered. Financing, investment and fee-based income generated from
mobilisation of restricted PSIA funds should be distinguished between income from
unrestricted PSIA funds and income from funds of shareholders and other fund
providers. Income generated from unrestricted PSIA funds after deducting expenses is
distributable between the IIFS and unrestricted IAH based on the agreed profit-sharing
ratio.

II. Expenses

248. Expenses refers to gross decreases in assets or increases in liabilities, or a
combination of both, during the reporting period of the income statement, which result
from “legitimate” activities from the SharÊ’ah point of view, such as financing, investment,
trading and rendering of services.

249. Additional characteristics of expense are that such decrease in assets or
increase in liabilities should not result from distribution to shareholders, unrestricted IAH,
current account holders and other non-IAH, or from the acquisition of assets. Such gross
decreases in assets or increases in liabilities have the same characteristics of assets or
liabilities, respectively, and relate to the reporting period.

250. Generally, IIFS distinguish between financing and operating expenses. Financing
expenses are attributed to costs directly or indirectly incurred in the mobilisation of
funds, including provisions or allowances for sub-standard, bad and doubtful financing,
as well as other related costs in the extension of financing. Operating or non-financing
expenses refers to personnel, administrative and other overhead expenses to maintain
the operations of the IIFS. Treatment of expenses to be directly deductible from jointly
funded income prior to the distribution to unrestricted IAH may vary among IIFS.

251. The AAOIFI Standard FAS No. 5 on Profit Allocation Methods identified two
methods – namely, the Separate Investment Account Method and the Pooling Method.
The Separate Investment Account Method, which is a more prevalent method,
involves deducting only direct financing and other financing-related expenses from jointly
funded income before distribution is made to unrestricted IAH. The Pooling Method, on
the other hand, recognises all expenses to be deducted before distributable profit is
shared between unrestricted IAH and shareholders. Please refer to Chapter 5, Section
5.1 for a further discussion on the Separate Investment Account Method and the Pooling
Method.

III. Gain

252. Gain represents a net increase in net assets, which results from holding assets
that appreciate in value during the reported period of the income statement or from
legitimate reciprocal and non-reciprocal transfers, except for non-reciprocal transfers
with equity owners or unrestricted IAH or their equivalent.

IV. Loss

253. Loss is a net decrease in net assets, which results from holding assets that
depreciate in value during the reported period of the income statement or from legitimate
reciprocal and non-reciprocal transfers, except for non-reciprocal transfers with equity
owners or unrestricted IAH or their equivalent.

V. Return

PSIA

254. Return on unrestricted PSIA and their equivalent is the share allocated to the
holders of these accounts out of the investment profits (and losses) from jointly funded
assets as a result of their joint participation with IIFS in financing, investment and trading
activities, as well as rendering of services.

255. Return on PSIA is not an expense but a form of distribution. Such distribution
could be from gross income after deducting direct financing or other financing-related
costs – that is, an allocation based on the Separate Investment Account Method.
Alternatively, the distribution could be undertaken after net income is determined – that
is, an allocation based on the Pooling Method.

VI. Net income (or net loss)

256. Net income (or net loss) for the reporting period of the income statement is the
net increase (or decrease) in owner’s equity resulting from revenues and gains after
deducting expenses and losses, and after allocating the return on PSIA or equivalent for
the period. The differences between income statement for banking and near-banking
IIFS and for conventional deposit takers as shown in table 6.1

Table 6.1: Mapping between the income statement for banking and near-near
banking IIFS and for conventional deposit takers

Income statement for
banking and near-banking
IIFS

Income statement for
deposit takers

Notes

Revenue/Income

Income from jointly
funded assets needs to
be separately disclosed.

Sales Financing Income
Lease Financing Income

Equity Financing Income

Gross Interest Income or
Gross Income from Loans
and Advances

Conventional interest
income earned is
replaced with profit/rent
from each financing type.

Investment Income

Gains or Losses on
Financial Instruments

Only income earned on
SharÊ’ah

permissible

securities or financial
instruments is
recognised.

Fee-based Income

Fees and Commissions
Receivable

Other Income

Financing and Non-
Financing Costs

Provisions for Accrued
Income on Non-Performing
Assets

Provisions for Accrued
Interest on Non-Performing
Assets

Non-performing assets
relate to sales, lease and
equity financing.

Provisions or Allowances for
Sub-standard, Bad and
Doubtful Financing

Loan Loss Provisions and
other Financial Asset
Provisions

Personnel, Administrative
and Other Overhead
Expenses (if any)

Non-Interest Expenses

Transfer to Profit
Equalisation Reserve (PER)

No Equivalent

Only profits from jointly
funded assets are
transferred to PER.

PER to Unrestricted PSIA

No Equivalent

PER to Shareholders’ Funds No Equivalent

Income Available to IIFS and
Unrestricted IAH (and
Depositors)

No Equivalent

Income Distributed to IAH
and Depositors

Interest Expense

Only profits from jointly
funded assets are
distributed to IAH.

Total Gross Income

Gross Income

Net Income before
Extraordinary Items, Zakah
and Tax

Net Income before
Extraordinary Items and
Taxes

Extraordinary Items

Provision for Zakah No

Equivalent

Income Tax

Net Income after Tax and
Zakah

Net Income after Tax

Net Income Available to IIFS No Equivalent

Dividends Payable

Retained Earnings

Balance Sheet

257. The main elements of a balance sheet are assets, liabilities, equity of
unrestricted PSIA and owners’ equity at the end of the accounting period.

I. Assets

258. An asset is anything that is capable of generating positive cash flows or other
economic benefits in the future, either by itself or in combination with other assets, of
which the IIFS has acquired the right to such benefits and control as a result of past
transaction(s) or event(s). In addition, the asset should be capable of financial
measurement with a reasonable degree or reliability, not to be associated with a non-
measurable obligation or right to another party and the IIFS has acquired the right to
hold, use or dispose of the asset.

259. Assets of IIFS could exist in the form of liquid assets, sales receivable assets,
equity financing or investment assets, as well as lease assets. Various types of contracts
defining contractual rights and obligations of counterparties underlie each category of
asset. For instance, sales receivable assets can be based on Murabahah, Bay’ Muajjal,
Salam or IstisnÉ´ contracts; equity financing or investments on MuÌÉrabah and
MushÉrakah contracts; and lease assets on IjÉrah and IjÉrah Muntahia Bittamleek
contracts. For the purpose of calculating relevant risk weights for the capital adequacy
ratio attached to the assets, a separate disclosure is required for each category of asset.

260. These assets can be jointly funded by unrestricted PSIA, shareholders’ funds,
and other non-PSIA funds such as customer or demand deposits (savings and current
accounts). In such an event, income generated from jointly funded assets will be shared
between all fund providers – namely, unrestricted IAH, shareholders and, in some cases,
demand depositors, according to the agreed profit-sharing ratio. In addition, appropriate
credit and market risk exposures arising from such assets will be proportionately borne
by unrestricted IAH.

261. Provisions for sub-standard, bad and doubtful financing or impairment value, as
well as relevant direct expenses attributed to the jointly funded assets, are apportioned
accordingly to arrive at the income distributed to the unrestricted IAH.

II. Liabilities

262. A liability is a present obligation to transfer assets, extend the use of an asset, or
provide services to another party in the future as a result of past transaction(s) or
event(s). In addition, a liability arises from an obligation to another party and not to be
reciprocal to an obligation of the other party to IIFS.

263. Demand deposits such as current accounts and savings accounts, which are
guaranteed by owner’s equity and, in most cases, represent non-MuÌÉrabah funds, are
considered as liabilities.

264. Other liabilities that could arise in the IIFS’ balance sheet include finance-related
deposits such as Salam payable for Salam financing and IstisnÉ´a payable for IstisnÉ´a
financing.

III. Equity of unrestricted PSIA

265. Equity of unrestricted IAH refers to funds received by the IIFS from individuals
and institutions on the basis that the IIFS has the right to use and invest those funds
without restrictions but within the ambit of SharÊ’ah rules and principles, including the
right to commingle the funds with its own investments in exchange for proportionate
participation in profits, with the IIFS receiving or accruing its share of profit as MuÌÉrib
(entrepreneur). Unrestricted PSIA represents the amount of funds placed by unrestricted
IAH based on a pre-agreed profit-sharing ratio with an expected return for a defined
investment horizon.

266. Reserves set aside from income distributable to unrestricted IAH are to be
reported together with the equity balance of unrestricted PSIA. PER, which is set aside
to smooth the returns paid to unrestricted PSIA, and IRR, which is set aside to buffer any
potential loss exposure of unrestricted PSIA as well as their movements, should be
disclosed as part of the total unrestricted PSIA balance as at the reporting balance sheet
date.

267. In some jurisdictions, features of PSIA are also found in current and savings
accounts where funds are mobilised on the basis of unrestricted MuÌÉrabah contracts.
Under such circumstances, it will be useful to address any requirement of PER allocation
for such demand deposits.

IV. Owner’s equity

268. Owner’s equity refers to the residual balance at the date of the balance sheet
after deducting IIFS’s liabilities, equity of unrestricted investment accounts and their
equivalent, as well as prohibited earnings, if any.

269. Prohibited earnings, or SharÊ’ah non-compliant income,

may arise from non-

halal (non-permissible) activities or from expenditures that do not comply with SharÊ’ah
rules and principles. Although an IIFS would not, in the normal course of business,
undertake SharÊ’ah non-compliant activities, unusual circumstances may result in the
IIFS generating income that is not in conformity with SharÊ’ah rules and principles. For
example, investment in the equity of corporations whose activities were earlier deemed
as halal but over a period of time became non-halal as these corporations transcend

Shari’ah

non-compliant income may arise from unlawful transactions or prohibited activities. Unlawful transactions

involve

riba

(usury),

gharar

(uncertain contract conditions),

zulm

(oppression) and

syubhah

(ambiguous) sources, or any

other conditions that could render contracts invalid. Prohibited activities include products and services that revolve around
gambling, intoxicants and pork-based substances, and other activities forbidden by

Shari’ah

rules and principles.

certain boundaries of SharÊ’ah permissibility. Under such circumstances, the income of
an IIFS should undergo Tazkiyyah, or a purification process, with a separate disclosure
of SharÊ’ah non-compliant income. The common practice has been to distribute it as a
donation to a charitable organisation or other parties as approved by the respective
SharÊ’ah committee or board.

270. In addition to other revenue, statutory or capital reserves, PER set aside from
income earned by shareholders’ funds shall be separately disclosed as part of the total
owner’s equity.

271. The balance sheet differences between banking and near-banking IIFS and for
conventional deposit takers as shown in table 6.2

Table 6.2: Mapping between the balance sheet for banking and near banking IIFS
and for conventional deposit takers

Balance sheet for banking and
near-banking IIFS

Balance sheet for deposit
takers

Notes

I. Total Assets

Jointly funded
assets are to be
separately
disclosed.

Non-Financial Assets

Financial Assets

Currency and Deposits

Only applicable to
SharÊ’ah compliant
deposits.

Sales Financing Assets

Lease Financing Assets

Equity Financing Assets

Gross Interbank and Non-
Interbank Loans

Sales, lease and
equity financing
assets are based
on different forms
of financing
contract.

Non-Financial Assets Related
to Sales, Lease and Equity
Financing

No Equivalent

Non-Financial
assets related to
sales, lease and
equity financing are
non-monetary
assets that could
represent claims on
other units.

Specific Provisions for Sub-
standard, Bad and Doubtful
Financing

Specific Provisions

Investments

Bonds Debt

Securities

SukËk

No Equivalent

Quoted Shares

Non-Quoted Shares

Shares and other Equity

Trust Certificates (unit
trusts/mutual funds, REITS and
others)

No Equivalent

Property/Real Estate

Structured Products

Financial Derivatives

Other Assets

II. Liabilities

Liabilities

Current Accounts

Non-MuÌÉrabah (Al-WadÊÑah or
QarÌ)

MuÌÉrabah

Savings Accounts

Non-MuÌÉrabah (Al-WadÊÑah or
QarÌ)

MuÌÉrabah

Customer Deposits and
Interbank Deposits

Parallel Salam Deposits

Parallel IstisnÉ´a Deposits

Issued Certificates of Credit

Repurchase Agreement (Repo)
– Bay’ al-Inah or Tawarruq

Other Deposits

Other Liabilities

Total Liabilities

Debt

Equity of Unrestricted IAH

No Equivalent

Amount of Unrestricted PSIA
Funds

Amount of PER Allocated to
Unrestricted IAH

Amount of IRR Allocated to
Unrestricted IAH

Capital and Reserves

Of which: PER Allocated to
Shareholders

No Equivalent

Balance Sheet Total

Statement of Restricted Investments

272. The main elements of a statement of restricted investments are deposits and
withdrawals of restricted PSIA and their equivalent, restricted investment profits and
losses before the investment manager’s share in investment profits as a MuÌÉrib or his
or her compensation as an investment agent, and the investment manager’s share in
investment profits or compensation during the period as at reporting date. The statement
of restricted investments bears a lot of similarity to the statement of changes in net asset
value (NAV) and/or the statement of income and expenditure of investment funds, unit
trusts and other forms of collective investment schemes (CIS).

Restricted investments

273. Restricted investments are assets acquired by funds provided by holders of
restricted PSIA or restricted IAH and their equivalent and managed by the IIFS as an
investment manager based on either a non-participating MuÌÉrabah contract or an
agency-based WakÉlah contract.

274. Restricted investments are not assets of the IIFS and should not be reflected on
the bank’s statement of financial position, since the bank does not have the right to use
or dispose of those investments except within the conditions of the contract between the
IIFS and restricted IAH or their equivalent.

II. Deposits by holders of restricted PSIA or their equivalent

275. Deposits by restricted IAH or their equivalent are funds received by the IIFS as
an investment manager (MuÌÉrabah mode) or agent (WakÉlah mode) from holders of
such accounts who agree that the IIFS invests their funds for a share in the investment
profits as a MuÌÉrib or for a fee as an agent.

III. Withdrawals by holders of restricted PSIA or their equivalent

276. Withdrawals by holders of restricted PSIA or their equivalent are funds received
by such restricted IAH or their equivalent out of the proceeds of restricted investments
that reduce the holders’ share in restricted investments.

277. Such withdrawals include transfer of all or part of the balance of the restricted
IAH to unrestricted IAH, current account holders or holders of other demand deposit
accounts; and transfer of all or part of the balance from one restricted investment
portfolio to another managed by the same IIFS and re-acquisition by mutual fund of
investment units previously issued by the fund.

IV. Profit (or loss) of restricted investments before the IIFS’ share in

investment profit

278. Restricted investment profit (or loss) before the IIFS’ share in investment profits
as a MuÌÉrib or compensation as an agent is the amount of net increase (or decrease) in
restricted investments other than increase (or decrease) resulting from deposits and
withdrawals by holders of restricted PSIA or their equivalent.

V. IIFS’ share of investment profit as an investment manager

279. IIFS’ share of investment profit as an investment manager of restricted
investment profits is either the percentage of profit allocated to IIFS as a MuÌÉrib or a
fixed agency fee, being compensation as an agent regardless of the performance of the
investment.

280. The statement of restricted investments differences between banking and near-
banking IIFS and conventional investment funds as shopwn in table 6.3

Table 6.3: Mapping between the statement of restricted investments for banking

and near-banking IIFS and the statement of investments for
conventional investment funds

Statement of restricted
investments for banking and
near-banking IIFS

Statement of changes in net
asset value and statement of
income and expenditure for
investment funds

Notes

Total Restricted PSIA
Funds as well as
Segmented Investment
Portfolios (at the beginning
of the period)

NAV (at the beginning of the
period)

Deposits Received

No Equivalent

Amounts Received out of
Units Issued

Amount of Investments of
Restricted PSIA Funds (at
the beginning of the
period)

Total Investments (at the
beginning of the period)

Amount of PER (at the
beginning of the period)

No Equivalent

No active profit-sharing
mechanism for
restricted IAH.

Amount of IRR (at the
beginning of the period)

No Equivalent

No loss provisions for
restricted IAH.

Total Investments and

No Equivalent

Reserves (at the beginning
of the period)
Amount

Number of Outstanding
Investment Units

Number of Investment Units
in Circulation (at the
beginning of the period)

Unit Value (at the
beginning of the period)

Unit Value (at the beginning
of the period)

Placement of Deposits
and/or Purchase of
Investment Units by
Restricted IAH

Deposits Received

No Equivalent

Amounts Received out of
Units Issued

Withdrawal of Deposits
and/or Sale of Investment
Units by Restricted IAH

Deposits Withdrawn

No Equivalent

Amounts Paid for Units
Cancelled

Net Movements of
Restricted PSIA Funds (at
the end of the period)

Net Changes in the Amount
of Deposits

No Equivalent

Net Amounts Received/
(Paid) due to Changes in the
Outstanding Number of Units

Net Amounts Received/(Paid)
due to Changes in the
Number of Units in
Circulation

Amount of Investments of
Restricted PSIA Funds (at
the end of the period)

Total Investments (at the end
of the period)

Investment Income

Investment Income

Profit (or Loss) on Disposal
of Investments and
Unrealised Capital Gain (or
Loss)

Profit/(Loss) on Disposal of
Investments and Unrealised
Capital Gain/(Loss)

Administrative
Expenditures

Administrative Expenses

IIFS's Fee as an Agent

Investment Management Fee

Net Investment Income

Net Investment Income

Amount of Profits
Transferable to/from PER

No Equivalent

Amount of Profits
Transferable to/from IRR

No Equivalent

Total Restricted PSIA
Funds (at the end of the
period)

Deposits Received

No Equivalent

Amounts Received out of
Units Issued

Amounts Received out of
Units Issued (at the end of
the period)

Amount of PER (at the end
of the period)

No Equivalent

Amount of IRR (at the end
of the period)

No Equivalent

Total Investments and
Reserves (at the end of the
period)

No Equivalent

Amount

Number of Outstanding
Investment Units

Number of Investment Units
in Circulation (at the end of
the period)

Unit Value (at the end of
the period)

Unit Value (at the end of the
period)

Memorandum Series

281. Some of the underlying data required to calculate the PSIFIs are not directly
available from any of the components of the sectoral financial statements. As such, they
are derived from the memorandum items, supplied to provide further information on the
financial statements. Memorandum series can be categorised into three groups –
namely, supervisory series, series for income statement analysis and series for balance
sheet analysis.

282. Supervisory series are directly sourced from supervisory information in view of
the conformity of ithe definitions with supervisory guidance. Series for income statement
analysis and for balance sheet analysis are series derived from the income statement
and the balance sheet, respectively, but require additional calculation or information
beyond those presented in Tables 6.1 and 6.2 to arrive at them.

283. The memorandum series differences between banking and near-banking IIFS
and conventional deposit takers as shown in table 6.4

Table 6.4: Mapping between the memorandum series for banking and near-

banking IIFS and for conventional deposit takers.

Memorandum series for banking and near-
banking IIFS

Memorandum series for deposit takers

I. Supervisory Series

Tier 1 Capital

Tier 2 Capital

Tier 3 Capital

Supervisory Deductions

Capital Adequacy Ratio

Amount of Regulatory Capital

Total Regulatory Capital

Amount of Credit Risk-Weighted Assets
(CRWA)

Credit Risk-Weighted Assets

Amount of CRWA Funded by Restricted
PSIA

No Equivalent

Amount of CRWA Funded by Unrestricted
PSIA

No Equivalent

Amount of Market Risk-Weighted Assets
(MRWA)

Market Risk-Weighted Assets

Amount of MRWA Funded by Restricted
PSIA

No Equivalent

Amount of MRWA Funded by Unrestricted
PSIA

No Equivalent

Amount of Capital Charge for Market Risk
Amount of Operational Risk-Weighted
Assets (ORWA)

Operational Risk-Weighted Assets

Amount of Capital Charge for Operational
Risk

(α) Amount of CRWA Funded by PER and
IRR of Unrestricted PSIA

No Equivalent

(α) Amount of MRWA Funded by PER and
IRR of Unrestricted PSIA

No Equivalent

Total Risk-Weighted Assets

Risk-Weighted Assets

Number of Large Exposures

II. Series for Income Statement
Analysis

Amount of Net Financing Income
(Sales, Lease and Equity Financing)

Financing Income Generated from Non-
Jointly Funded Assets

No Equivalent

Financing Income Generated from Jointly
Funded Assets

No Equivalent

Amount of Investment Income

Investment Income Generated from Non-
Jointly Funded Assets

No Equivalent

Investment Income Generated from Jointly
Funded Assets

No Equivalent

Amount of Profit Distributed to IAH

No Equivalent

Amount of

SharÊ’ah Non-Compliant

Income

No Equivalent

III. Series for Balance Sheet Analysis

Amount of Liquid Assets

Amount of Broad Liquid Assets

Liquid Assets (Broad Measure)

Amount of Core Liquid Assets

Liquid Assets (Core)

Amount of Short-Term Liabilities

Short-Term Liabilities

Amount of Outstanding Sales, Lease
and Equity Financing (including Non-
Performing Financing and Specific
Provisions)

Financing by Types of Contract

No Equivalent

Financing by Economic Activities (sectoral
distribution)

Financing by Geographical Distribution
(for exposure to country or regional risk)

Geographic Distribution of Loans

Amount of Gross Non-Performing
Financing

Non-Performing Loans (NPLs)

Gross Non-Performing Financing by
Types of Contract

No Equivalent

Gross Non-Performing Financing by
Economic Activities (sectoral distribution)

General Provisions or General
Allowance for Sub-standard, Bad and
Doubtful Financing

General Provisions

General Provisions by Types of Contract

No Equivalent

Specific Provisions or Specific
Allowance for Sub-standard, Bad and
Doubtful Financing

Specific Provisions

General Provisions by Types of Contract

No Equivalent

Amount of Net Non-Performing
Financing

Net NPLs

Total Foreign Currency-Denominated
Financing

Foreign Currency Loans

Total Foreign Currency-Denominated
Funding (ex-shareholders’ equity)

Foreign Currency Liabilities

Total Equity Net Open Positions

Net Open Position in Equities

Total Foreign Exchange Net Open
Positions

Net Open Position in Foreign Currency
for On-Balance Sheet Items

Total Commodity Net Open Positions

No Equivalent

Total Value of

SukËk Positions

No Equivalent

6.2

SECTORAL FINANCIAL STATEMENTS AND MEMORANDUM SERIES

284. The sectoral financial statement for banking and near-banking IIFS is set out in
Tables 6.5, 6.6 and 6.7, while Table 6.8 provides other relevant information not included
in the sectoral financial statement, such as the memorandum series. A box containing
explanatory notes for each line item will complement the respective table. The
numbering of line items in the box of explanatory notes follows that in Tables 6.5, 6.6,
6.7 and 6.8. For IIFS, the main sources of revenue are incomes derived from sales-
based financing, lease-based financing, equity-based financing and investments, as well
as fee-based income.

Income Statement

Table 6.5: Line-by-line items in the Income Statement

Income Statement

Item
numbering

Operations

Revenue/Income from Jointly Funded Assets

6.5.1

Sales Financing Income

6.5.1(a)

Lease Financing Income

6.5.1(b)

Equity Financing Income

6.5.1(c)

Investment Income

6.5.1(d)

Fee-based Income

6.5.1(e)

Other Income

6.5.1(f)

Financing and Non-Financing Costs

6.5.2

Provisions for Accrued Income on Non-Performing
Assets

6.5.2(a)

Personnel, Administrative and Other Overhead
Expenses (if any)

6.5.2(b)

Provisions or Allowances for Sub-standard, Bad and
Doubtful Financing, and Other Financial Asset Provisions 6.5.2(c)

Transfer to Profit Equalisation Reserve (PER)

6.5.3

PER to Unrestricted PSIA

6.5.3(a)

PER to Shareholders’ Funds

6.5.3(b)

Income Available to IIFS and Unrestricted IAH (and
Depositors) 6.5.4

6.5.1 – 6.5.2
– 6.5.3

Income Distributed to IAH and Depositors

6.5.5

Total Gross Income

6.5.6

6.5.1 –
6.5.2(a) –
6.5.5

Net Income before Extraordinary Items, Zakah and
Taxes

6.5.7

6.5.6 –
6.5.2(b) –
6.5.2(c)

Extraordinary Items

6.5.8

Provision for Zakah

6.5.9

Provision for Tax

6.5.10

Net Income after Tax and Zakah 6.5.11

6.5.7– 6.5.8
– 6.5.9 –
6.5.10

Net Income Available to IIFS

6.5.12

6.5.11 –
6.5.3

Dividends Payable

6.5.13

Retained Earnings

6.5.14

6.5.12 -
6.5.13

BOX 6.1: EXPLANATORY NOTES FOR LINE ITEMS OF THE INCOME STATEMENT

Item 6.5.1: Revenue/Income from Jointly Funded Assets

Revenue or income earned on jointly funded assets represents total income generated

from mobilised funds, which are commingled from various sources including
unrestricted PSIA. Composition of the income generated from jointly funded activities is
segmented further into income from sales financing (Item 6.5.1(a)), income from lease
financing (Item 6.5.1(b)), income from equity financing (Item 6.5.1(c)), investment
income (Item 6.5.1(d)), fee-based income (Item 6.5.1(e)) and other income (Item
6.5.1(f)).

Income from sales financing, lease financing and equity financing forms the total
financing income, while investment income, fee-based income and other income make
up the non-financing income.

Investment income (Item 6.5.1(d)) includes realised and unrealised gains and losses
made during each period on all financial instruments and securities (financial assets
and liabilities, in domestic and foreign currencies) valued at market or fair value. These
securities are held either for trading (dealing account or trading book) or for investment
(investment account or banking book). Securities held for investment are further
categorised by IAS 39 into securities available for sale and securities held to maturity.
However, investment income excludes income from sale of equity in associates,
subsidiaries and reverse equity investments, as well as any financing income included
in the net financing income account.

Fee-based income (Item 6.5.1(e)) is income earned on services rendered by an IIFS,
including payment services, intermediary services, services related to transactions in
securities (such as brokerage, placements and underwriting of new issues, etc.) and
services related to asset management (such as portfolio management, safe custody,
etc.).

Other income (Item 6.5.1(f)) may include dividends declared payable by other
corporations or cooperatives in which an IIFS has an equity stake; gains or losses on
sales of fixed assets; rental and royalty income receivable (such as income from
ownership of buildings, other structures and equipment; land and subsoil assets; other
produced and non-produced assets, etc.); and any amounts receivable arising from
compensation for damage or injury.

Item 6.5.2: Financing and Non-Financing Costs

Financing and non-financing costs refers to expenses directly or indirectly incurred in
the mobilisation of commingled funds for jointly funded assets. These expenses may
include direct financing expenses such as provisions for accrued income on non-
performing assets (Item 6.5.2(a)) which are meant to estimate the probability of
accrued income ceasing to be recognised due to non-performance of the financing
asset, as well as indirect financing expenses such as provisions or allowances for sub-
standard, bad and doubtful financing

(Item 6.5.2(b)). In certain jurisdictions,

supervisors prescribe the levels of general provisions. Non-financing or operating costs
may include personnel, administrative and other overhead expenses (if any) (Item
6.5.2(c)).

Item 6.5.3: Transfer to Profit Equalisation Reserve

AAOIFI FAS No. 11 on Provisions and Reserves stipulates disclosure requirements for provisions for bad and doubtful

financing.

An amount of jointly funded income set aside as a reserve to smooth or reduce volatility
of returns to unrestricted IAH (as well as to shareholders) is disclosed separately as a
line item. The basis of determination and allocation of PER to be disclosed can be
referred to AAOIFI FAS No. 11 on Provisions and Reserves. Proportion of PER
allocated to unrestricted IAH (Item 6.5.3(a)) and to shareholders (Item 6.5.3(b)),
according to an agreed profit-sharing ratio, could be additional items to be disclosed.

Item 6.5.4: Income Available to IIFS and Unrestricted IAH (and Depositors)

Income available or distributable to IIFS and unrestricted IAH (and depositors) refers to
the income to be apportioned between the two parties according to the pre-agreed
profit-sharing ratio (or any other method for non-MuÌÉrabah savings and current
accounts). This line item shall reflect the Separate Investment Account Method for
profit allocation

to unrestricted IAH – that is, after deducting financing and non-

financing costs (Item 6.5.2) and the amount set aside for the PER (Item 6.5.3) out of
income from jointly funded assets.

Item 6.5.5: Income Distributed to IAH and Depositors

This line item discloses the amount of jointly funded income effectively distributed to
IAH according to the pre-agreed profit-sharing ratio, as well as to savings and current
account holders.

Item 6.5.6: Total Gross Income

Total gross income represents the sum of net income from financing activities and all
other non-financing income (investment, fee-based and other income, if any) earned on
jointly funded and non-jointly funded assets minus the income effectively distributed to
IAH and depositors (Item 6.5.5), as well as the provisions for accrued income on non-
performing assets (Item 6.5.2(a)).

Item 6.5.7: Net Income before Extraordinary Items, Zakah and Taxes

Net income before extraordinary items, zakah and income tax is the income earned by
shareholders after deducting all expenses, as well as distribution to unrestricted IAH
but before deduction for extraordinary items, zakah and taxes.

Item 6.5.8: Extraordinary Items

Extraordinary items may comprise income or expenses arising from events or
transactions out of the ordinary in relation to the business activities usually carried out
by IIFS and which therefore are not expected to recur frequently or regularly, such as
liquidation of fixed assets. Such events would be rare and include catastrophic losses
arising from a natural or other disaster.

Items 6.5.9 and 6.5.10: Provision for Zakah and for Tax

Shareholders’ contribution to zakah shall be based on either the Net Invested Fund
Method

or the Net Asset Method disclosed as provision for zakah (Item 6.5.9), as well

as tax incurred for the year as provision for tax (Item 6.5.10).

Zakah, which means “to purify or cleanse”, is the third pillar of Islam. It is to be paid out
once a year on the wealth accumulated at the rate of 2½% of outstanding wealth
exceeding a zakatable amount at the end of an accounting period. This rate applies to
cash, bank savings, gold, silver and jewellery. Being a contribution for welfare
purposes, zakah is one of the redistributive means towards a more equitable society.

Income tax usually refers to the corporate tax deducted from taxable corporate income.
In more general terms, income taxes are related to the income, profits and/or capital
gains of IIFS.

Item 6.5.11: Net Income after Tax and Zakah

This is a line item that discloses the net income after tax of IIFS – that is, net income
upon consolidation after deducting extraordinary items, taxes and zakah but before
taking into account the minority interest (Item 6.5.11(a)), which represents the equity of
other parties in a related company or the equity of minority shareholders in a Group’s
consolidated financial accounts or holding company. For a further discussion on
minority interest, please refer to Item 6.2.23.

Item 6.5.12: Net Income Available to IIFS

This line item discloses the amount of income effectively available to an IIFS after
deducting the amount set aside for the PER (Item 6.5.3) out of the net income after tax
and zakah.

Item 6.5.13: Dividends Payable

Dividends are the amounts declared payable to the owners or shareholders of IIFS
after all other expenses have been met.

Item 6.5.14: Retained Earnings

Retained earnings reflect the net income available to IIFS after deducting dividends
payable, which will be posted to the retained earnings account of capital and reserves.

Balance Sheet

Table 6.6: Line-by-line items in the balance sheet

Balance sheet

Item numbering

Operations

I. Total Assets

6.6.1

6.6.2 + 6.6.3

Non-Financial Assets

6.6.2

Financial Assets

6.6.3

6.6.4 + 6.6.5 +
6.6.6 + 6.6.76 +
6.6.87 – 6.6.9 +
6.6.10 + 6.6.110

Currency and Deposits

6.6.4

Sales Financing Assets

6.6.5

Murabaha

6.6.5(a)

Bay’ Muajjal

6.6.5(b)

Salam

6.6.5(c)

IstisnÉ´a

6.6.5(d)

Others

6.6.5(e)

Lease Financing Assets

6.6.6

IjÉrah

6.6.6(a)

IjÉrah Muntahia Bittamleek

6.6.6(b)

Equity Financing Assets

6.6.7

MuÌÉrabah

6.6.7(a)

MushÉrakah

6.6.7(b)

Non-Financial Assets Related to Sales, Lease
and Equity Financing

6.6.8

Specific Provisions for Sub-standard, Bad and
Doubtful Financing

6.6.9

Investments 6.6.10

Bonds 6.6.10(a)

SukËk

6.6.10(b)

Quoted Shares

6.6.10(c)

Non-Quoted Shares

6.6.10(d)

Trust Certificates (unit trusts/mutual funds,
REITS and others)

6.6.10(e)

Property/Real Estate

6.6.10(f)

Structured Products

6.6.10(g)

Other Assets

6.6.11

II. Liabilities

Current Accounts

6.6.12

Non-MuÌÉrabah (Al-WadÊÑah or QarÌ) 6.6.12(a)

MuÌÉrabah

6.6.12(b)

Savings Accounts

6.6.13

Non-MuÌÉrabah (Al-WadÊÑah or QarÌ) 6.6.13(a)

MuÌÉrabah

6.6.13(b)

Parallel Salam Deposits

6.6.14

Parallel IstisnÉ´a Deposits

6.6.15

Issued Certificates of Credit

6.6.16

Repurchase Agreement (Repo) – Bay’ al-Inah
or Tawarruq

Other Liabilities

6.6.17

Total Liabilities

6.6.18

6.6.12 + 6.6.13 +
6.6.14 + 6.6.15 +
6.6.16 + 6.6.17

Equity of Unrestricted IAH

6.6.19

Amount of Unrestricted PSIA Funds

6.6.19(a)

Amount of PER Allocated to Unrestricted IAH

6.6.19(b)

Amount of IRR Allocated to Unrestricted IAH

6.6.19(c)

Capital and Reserves

6.6.20

Of which: PER Allocated to Shareholders

6.6.20(a)

Balance Sheet Total

6.6.21

6.6.18 + 6.6.19 +
6.6.20

BOX 6.2: EXPLANATORY NOTES FOR LINE ITEMS OF THE BALANCE SHEET

Item 6.6.1: Total Assets

Total assets represent the summation of non-financial assets (Item 6.6.2) and financial
assets (Item 6.6.3).

Item 6.6.2: Non-Financial Assets

Non-financial assets are all economic assets other than financial assets. By definition,
non-financial assets provide benefits to their owners but do not represent claims on
other units. Most non-financial assets provide benefits either through their use in the
production of goods and services or in the form of property income. In general, an IIFS
has two types of non-financial assets – namely, fixed assets and intangible assets.

Fixed assets, which are long-term non-financial assets used by an IIFS in the
production of its income and which are not expected to be consumed or converted into
cash in the normal course of business operations – such as property, machinery and
equipment, vehicles and furniture – can be disclosed as separate line items. Usually,
fixed assets are used repeatedly or continuously in the processes of production for
more than one year.

Any form of intangible rights acquired by IIFS, which may include patents, copyrights,
franchises, goodwill, trademarks, trade names, etc., can also be reported in this line
item. According to IAS 38, an intangible asset is defined as an identifiable non-financial
asset without physical substance. The three critical attributes of an intangible asset are:
identifiability; control, or the ability to make use of the asset; and future economic
benefits, such as revenues or reduced future costs.

Item 6.6.3: Financial Assets

Financial assets represent financial claims over which ownership rights are enforced
and from which economic benefits may be derived by their owners. Financial assets
can also be the store of value. Financial claims arise out of contractual relationships
between institutional units, and often such claims entitle the owner (i.e. the creditor) to
receive one or more payments (such as instalments) from the institutional unit on which
the owner has the claim (i.e. the debtor). In addition, some financial assets generate
holding gains (and losses) for their owners. When a financial claim is created, a liability
of equal value is simultaneously incurred by the debtor as the counterpart to the
financial asset.

Item 6.6.4: Currency and Deposits

This line item discloses all forms of cash and cash-equivalent items, which may include
cash deposits with other IIFS or any other short-term interbank operations and
placements in SharÊ’ah approved short-term money market financial instruments.
These inter-IIFS transactions and positions may raise some aggregation and
consolidation-related issues.

Item 6.6.5: Sales Financing Assets

Sales financing receivables refers to the amount of financing provided by IIFS involving
sale of assets. This line item is segmented according to sales contracts which may
include Murabahah (Item 6.6.5(a)), Bay’ Muajjal (Item 6.6.5(b)); Salam (Item 6.6.5(c))
and IstisnÉ´a (Item 6.6.5(d)), and any other sales-type contracts (Item 6.6.5(e)).

Item 6.6.6: Lease Financing Assets

Lease financing assets are disclosed as a line item in the balance sheet of IIFS. All
expenses related to the asset are borne by IIFS. This line item is further segmented for
disclosure purposes into IjÉrah (Item 6.6.6(a)) and IjÉrah Muntahia Bittamleek (Item
6.6.6(b)).

Item 6.6.7: Equity Financing Assets

Equity financing is a form of financing on a profit-sharing basis and may be segmented
according to contracts such as profit-sharing-and-loss-bearing MuÌÉrabah (Item
6.6.7(a)) and profit-and-loss-sharing MushÉrakah (Item 6.6.7(b)).

Item 6.6.8: Non-Financial Assets Related to Sales, Lease and Equity Financing

Non-financial assets available for sale are reported as inventory of real assets held for
sales financing, since they will be subsequently sold and reported as sales financing.

Non-financial assets related to lease financing are leased assets with no
condition of ownership transfer to the customer.

For MuÌÉrabah contracts, IIFS may provide a non-financial MuÌÉrabah asset as capital
in the profit-sharing agreement. Where such activity arises, this line item addresses

such asset disclosure.

Item 6.6.9: Specific Provisions for Sub-standard, Bad and Doubtful Financing

A specific provision/allowance is set aside when potential losses are identified for an
individual financing, or for losses of a pool of collectively assessed small financings with
common characteristics. Please refer to Item 6.8.17 of Table 6.8 for further discussion.

Item 6.6.10: Investments

IIFS undertake several forms of investments that are disclosed according to specific
financial instruments, which may include: SharÊ’ah permissible bonds (Item 6.6.10(a));
SukËk (Item 6.6.10(b)); SharÊ’ah permissible quoted shares (Item 6.6.10(c)); SharÊ’ah
permissible non-quoted shares (Item 6.6.10(d)); SharÊ’ah permissible trust certificates
(Item 6.6.10(e)); SharÊ’ah permissible property/real estate (Item 6.6.10(f)); and SharÊ’ah
permissible structured products (Item 6.6.10(g)).

Item 6.6.11: Other Assets

Any other assets not accounted for by other line items shall be disclosed in this line
item. Other assets may include non-banking or incidental assets reported by an IIFS as
part of its operations.

Item 6.6.12: Current Accounts

Current or chequing accounts are demand deposits reported as liabilities in the balance
sheet of IIFS. At some IIFS, profit-sharing contracts are used to establish their
relationship with current account holders. This disclosure line item segregates non-
MuÌÉrabah current accounts (Item 6.6.12(a)), which are based either on Al WadÊÑah or
QarÌ contracts, from MuÌÉrabah current accounts, if any (Item 6.6.12(b)).

Item 6.6.13: Savings Accounts

Savings accounts are demand deposits reported as liabilities in the balance sheet of
IIFS. At some IIFS, profit-sharing contracts are used to establish their relationship with
savings account holders. This disclosure line item segregates non-MuÌÉrabah savings
accounts (Item 6.6.13(a)), which are based either on Al WadÊÑah or QarÌ contracts, from
MuÌÉrabah savings accounts, if any (Item 6.6.13(b)).

Items 6.6.14 and 6.6.15: Parallel Salam Deposits and Parallel

IstisnÉ´a Deposits

Parallel Salam deposits (Item 6.6.14) and Parallel IstisnÉ´a deposits (Item 6.6.15) are
sales financing-related liabilities in the form of deposits received by IIFS in conjunction
with sales financing – that is, trade-related assets purchased (Salam financing) or
constructed (IstisnÉ´a financing) at present with the agreement to be delivered in the
future.

Item 6.6.16: Issued Certificates of Credit

Issued certificates of credit may exist in some jurisdictions, whereby IIFS issue asset-
based short-term papers such as repo based on Bay’ al-Inah or Tawarruq contracts to

manage their short-term liquidity needs.

Item 6.6.17: Other Liabilities

This line item discloses other types of liabilities not included in the above
classifications, including all other forms of trade payables such as any credit
transactions involving operating activities of an IIFS, which may consist of accrued
utility expenses, among others.

Item 6.6.18: Total Liabilities

Total liabilities represent the sum of customer demand deposits – that is, current
accounts (Item 6.6.12) and savings accounts (Item 6.6.13), sales financing-related
liabilities (Items 6.6.14 and 6.6.15), issued certificates of credit (Item 6.6.16) and other
liabilities (Item 6.6.17).

Item 6.6.19: Equity of Unrestricted IAH

This line item should disclose the outstanding balance as at the reporting date of
unrestricted PSIA funds (Item 6.6.19(a)), as well as any amount of distributable income
to unrestricted IAH which is set aside in the PER (Item 6.6.19(b)) and IRR (Item
6.6.19(c)).

Item 6.6.20: Capital and Reserves

Capital and reserves refers to owners’ or shareholders’ equity, which may include paid-
up ordinary share capital, reserves, preference share capital, current surplus/(loss)
from sale of fixed and long-term investments and PER from distributable income set
aside for shareholders, as well as any other funds contributed by owners. Capital and
reserves also represent the difference between total assets and total liabilities.
Separate disclosure of different sub-line items can be considered. For example,
reserves may include retained profits/(losses), share premiums, approved audited half-
year profits/(losses), general reserve fund, statutory and legal reserve fund, revaluation
reserve and capital redemption reserve.

Item 6.6.21: Balance Sheet Total

Balance sheet total represents the summation of total liabilities (Item 6.6.18), equity of
unrestricted IAH (Item 6.6.19), as well as capital and reserves (Item 6.6.20).

Statement of Restricted Investments

Table 6.7: Line-by-line items in the Statement of Restricted Investments

Statement of restricted investments

Item
numbering

Operations

Total Restricted PSIA Funds as well as Segmented
Investment Portfolios (at the beginning of the period)

6.7.1

Deposits Received

6.7.1(a)

Amounts Received out of Units Issued

6.7.1(b)

Amount of Investments of Restricted PSIA Funds (at
the beginning of the period)

6.7.2

Amount of PER (at the beginning of the period)

6.7.3

Amount of IRR (at the beginning of the period)

6.7.4

Total Investments and Reserves (at the beginning of
the period)

6.7.5

6.7.2 + 6.7.3
+ 6.7.4

Amount 6.7.5(a)

Number of Outstanding Investment Units

6.7.5(b)

Unit Value (at the beginning of the period)

6.7.6

6.7.5(a)
divided by
6.7.5(b)

Placement of Deposits and/or Purchase of Investment
Units by Restricted IAH

6.7.7

Deposits Received

6.7.7(a)

Amounts Received out of Units Issued

6.7.7(b)

Withdrawal of Deposits and/or Sale of Investment Units
by Restricted IAH

6.7.8

Deposits Withdrawn

6.7.8(a)

Amounts Paid for Units Cancelled

6.7.8(b)

Net Movements of Restricted PSIA Funds (at the end of
the period)

6.7.9

6.7.7 – 6.7.8

Net Changes in the Amount of Deposits

6.7.9(a)

6.7.7(a) –
6.7.8(a)

Net Amounts Received/(Paid) due to Changes in the
Outstanding Number of Units

6.7.9(b)

6.7.7(b) –
6.7.8(b)

Amount of Investments of Restricted PSIA Funds (at
the end of the period)

6.7.10

Investment Income

6.7.11

Profit (or Loss) on Disposal of Investments and
Unrealised Capital Gain (or Loss)

6.7.12

Administrative Expenditures

6.7.13

IIFS's Fee as an Agent

6.7.14

Net Investment Income

6.7.15

6.7.11 +
6.7.12 –

6.7.13 –
6.7.14

Amount of Profits Transferable to/from PER

6.7.16

Amount of Profits Transferable to/from IRR

6.7.17

Total Restricted PSIA Funds (at the end of the period)

6.7.18

6.7.1 + 6.7.9

Deposits Received

6.7.18(a)

6.7.1(a) +
6.7.9(a)

Amounts Received out of Units Issued

6.7.18(b)

6.7.1(b) +
6.7.9(b)

Amount of PER (at the end of the period)

6.7.19

6.7.3 (+/-)
6.7.16

Amount of IRR (at the end of the period)

6.7.20

6.7.4 (+/-)
6.7.17

Total Investments and Reserves (at the end of the
period) 6.7.21

6.7.10 +
6.7.15 +
6.7.18 +
6.7.19 +
6.7.20

Amount

6.7.21(a)

Number of Outstanding Investment Units

6.7.21(b)

Unit Value (at the end of the period)

6.7.22

6.7.21(a)
divided by
6.7.21(b)

BOX 6.3: EXPLANATORY NOTES FOR LINE ITEMS OF THE STATEMENT OF
RESTRICTED INVESTMENTS

Item 6.7.1: Total Restricted PSIA Funds as well as Segmented Investment
Portfolios (beginning of period)

This line item refers to brought-down balance of total funds mobilised by IIFS on behalf
of restricted IAH. The statement may include deposits received (Item 6.7.1(a)) and/or
the amount of monies received in exchange for investment units issued (Item 6.7.1(b))
by IIFS. In many respects, restricted PSIA can be considered as a form of collective
investment schemes as demonstrated in Table 6.3 under Chapter 6, Section 6.1.
Indeed, restricted PSIA funds could be segregated into various schemes of investment
and/or segments by objective of investment portfolios, while the relevant underlying
contracts shall also be disclosed.

Item 6.7.2: Amount of Investments of Restricted PSIA Funds (beginning of
period)

This line item refers to brought-down balance at market value of amount of total
restricted PSIA funds effectively invested.

Items 6.7.3 and 6.7.4: Amount of PER (beginning of period) and Amount of IRR
(beginning of period)

These line items refer to brought-down balance of outstanding value of PER (Item
6.7.3) and of IRR (Item 6.7.4) allocated to restricted IAH, set aside from net profits on
investments or net investment incomes in previous periods.

Items 6.7.5 and 6.7.6: Total Amount of Investments and Reserves and Unit Value
(beginning of period

)

Total investments and reserves (Item 6.7.5) at market value refers to the sum of the
outstanding values of investments of restricted PSIA funds, as well as of PER and IRR
at the beginning of the period. This line item can be disclosed in terms of outstanding
amount or outstanding number of investment units in circulation. The unit value (Item
6.7.6) at the beginning of the period is derived based on the total market value of
outstanding investment units.

Items 6.7.7, 6.7.8 and 6.7.9: Placement of Deposits and/or Purchase of Investment
Units by Restricted IAH; Withdrawal of Deposits and/or Sale of Investment Units
by Restricted IAH; and Net Movements of Restricted PSIA Funds (at the end of
the period)

Item 6.7.7 discloses the amount of deposits received and/or the amounts received from
restricted IAH in exchange for investment units issued by IIFS, while Item 6.7.8
discloses the amount of deposits withdrawn and/or the amounts paid by IIFS to
repurchase investment units from restricted IAH. Net movements of restricted PSIA
funds (Item 6.7.9) shall reflect the net result between positive flows (Item 6.7.7) and
negative flows (Item 6.7.8) as at end-period in terms of net amount of deposits and/or
net amounts received due to changes in the outstanding number of investment units.

Item 6.7.10: Amount of Investments of Restricted PSIA Funds (at the end of the
period)

This line item refers to the amount at market value of total restricted PSIA funds
effectively invested as at end-period after taking into account net movements of
investments.

Items 6.7.11 to 6.7.17: Investment Income up to Amount of Profits Transferable
to/from IRR

These line items disclose the income generated from investment activities such as
dividend or other types of return on investment (Item 6.7.11); the recognition at market
value of profit (or loss) on disposal of investments made using restricted PSIA funds
and unrealised capital gain (or loss) (Item 6.7.12); as well as deduction of
administrative expenditures (Item 6.7.13) and IIFS's fee as an agent (Item 6.7.14) in
order to determine net investment profit income (Item 6.7.15). In addition, the amount of
profits transferable to/from PER (Item 6.7.15) and IRR (Item 6.7.16), set aside before
dividends distributable or capitalised as investment units, is calculated based on net

investment income.

Item 6.7.18: Total Restricted PSIA Funds (end of period)

This line item refers to total funds mobilised by IIFS on behalf of restricted IAH as at
end-period, after taking into account net movements of restricted PSIA funds (Item
6.7.9). This line item can be segregated into deposits received and/or amounts
received from investment units issued by IIFS.

Items 6.7.19 and 6.7.20: Amount of PER (end of period) and Amount of IRR (end
of period)

These line items refer to the outstanding balance, as at end-period, of PER (Item
6.7.19) and of IRR (Item 6.7.20) allocated to restricted IAH, set aside from net profits on
investments in previous periods and on investments during the reporting period (Item
6.7.15).

Items 6.7.21 and 6.7.22: Total Investments and Reserves (end of period) and Unit
Value (end of period)

Total investments and reserves (Item 6.7.21) shall refer to the sum of the outstanding
amount of investments of restricted PSIA funds at market value, as well as the
outstanding balance of PER and IRR as at end-period. This line item can be disclosed
in terms of outstanding amount or outstanding number of investment units in circulation.

The unit value as at end-period (Item 6.7.22) represents the value per unit at market
price of the outstanding number of investment units in circulation after taking into
account capitalisation or dividends.

Memorandum Series

Table 6.8: Line-by-line items in the Memorandum Series

Memorandum series

Item
numbering

I. Supervisory Series

Tier 1 Capital

6.8.1

Tier 2 Capital

6.8.2

Tier 3 Capital

6.8.3

Supervisory Deductions

6.8.4

Capital Adequacy Ratio

6.8.5

Amount of Regulatory Capital

6.8.5(a)

Amount of Credit Risk-Weighted Assets (CRWA)

6.8.5(b) =
6.8.5(c) +
6.8.5(d)

Amount of CRWA Funded by Restricted PSIA

6.8.5(c)

Amount of CRWA Funded by Unrestricted PSIA

6.8.56(d)

Amount of Market Risk-Weighted Assets (MRWA)

6.8.5(e) =
6.8.5(f) +
6.8.5(g)

Amount of MRWA Funded by Restricted PSIA

6.8.5(f)

Amount of MRWA Funded by Unrestricted PSIA

6.8.5(g)

Amount of Capital Charge for Market Risk

6.8.5(h)

Amount of Operational Risk-Weighted Assets (ORWA)

6.8.5(i)

Amount of Capital Charge for Operational Risk

6.8.5(j)

(α) Amount of CRWA Funded by PER and IRR of Unrestricted PSIA

6.8.5(k)

(α) Amount of MRWA Funded by PER and IRR of Unrestricted PSIA

6.8.5(l)

Total Risk-Weighted Assets

6.8.6

6.8.5(b) +
6.8.5(e) +
6.8.5(i)

Number of Large Exposures

6.8.7

II. Series for Income Statement Analysis

Amount of Net Financing Income (Sales, Lease and Equity Financing)

6.8.8

Financing Income Generated from Non-Jointly Funded Assets

6.8.8(a)

Financing Income Generated from Jointly Funded Assets

6.8.8(b)

Amount of Investment Income

6.8.9

Investment Income Generated from Non-Jointly Funded Assets

6.8.9(a)

Investment Income Generated from Jointly Funded Assets

6.8.9(b)

Amount of Profit Distributed to IAH

6.8.10

Amount of SharÊ’ah Non-Compliant Income

6.8.11

III. Series for Balance Sheet Analysis

Amount of Liquid Assets

6.8.12

Amount of Broad Liquid Assets

6.8.12(a)

Amount of Core Liquid Assets

6.8.12(b)

Amount of Short-Term Liabilities

6.8.13

Amount of Outstanding Sales, Lease and Equity Financing (including 6.8.14

Non-Performing Financing and Specific Provisions)
Financing by Types of Contract

6.8.14(a)

Financing by Economic Activities (sectoral distribution)

6.8.14(b)

Financing by Geographical Distribution (for exposure to country or
regional risk)

6.8.14(c)

Amount of Gross Non-Performing Financing

6.8.15

Gross Non-Performing Financing by Types of Contract

6.8.15(a)

Gross Non-Performing Financing by Economic Activities (sectoral
distribution)

6.8.15(b)

General Provisions or General Allowance for Sub-standard, Bad and
Doubtful Financing

6.8.16

General Provisions by Types of Contract

6.8.16(a)

Specific Provisions or Specific Allowance for Sub-standard, Bad and
Doubtful Financing

6.8.17

General Provisions by Types of Contract

6.8.17(a)

Amount of Net Non-Performing Financing

6.8.18

6.8.15 –
6.8.17

Total Foreign Currency-Denominated Financing

6.8.19

Total Foreign Currency-Denominated Funding (ex-shareholders’ equity) 6.8.20

Total Equity Net Open Positions

6.8.21

Total Foreign Exchange Net Open Positions

6.8.22

Total Commodity Net Open Positions

6.8.23

Total Value of SukËk Positions

6.8.24

BOX 6.8: EXPLANATORY NOTES FOR LINE ITEMS OF THE MEMORANDUM
SERIES

SUPERVISORY SERIES

Items 6.8.1, 6.8.2, 6.8.3 and 6.8.4: Tier 1 Capital, Tier 2 Capital, Tier 3 Capital and
Supervisory Deductions

According to Basel II (Revised June 2006), Tier 1 Capital (Item 6.8.1) or core capital
includes only equity capital and disclosed reserves.

Equity capital or permanent shareholders’ equity includes issued and fully paid ordinary

shares/common stock and non-cumulative perpetual preferred stock (but excluding
cumulative preference shares).

Disclosed or published reserves, which are created or increased by appropriations of
retained earnings or other surplus (such as surplus capital from insurance subsidiaries),
include share premiums, retained profit, general reserves, legal reserves and general
funds (but excluding revaluation reserves). In the case of consolidated accounts, Tier 1
Capital also includes minority interests in the equity of subsidiaries that are less than
wholly owned.

Tier 2 Capital (Item 6.8.2) or supplementary capital, which is limited to 100% of Tier 1
Capital, shall include undisclosed reserves, asset revaluation reserves, general
provisions/general financing-loss provisions, hybrid (debt/equity) capital instruments
and subordinated term debt.

Undisclosed reserves are part of the accumulated after-tax surplus of retained profits
permitted to remain unpublished but unencumbered by any provision or other known
liability – hence, freely and immediately available to cover unforeseen future losses (but
excluding hidden values arising from holdings of securities in the balance sheet at
below current market prices).

Revaluation reserves, which may be included in Tier 2 Capital as long as they are
prudently valued, may arise in two ways: first, reserves arising from a formal
revaluation of fixed assets (usually own premises) as well as law-initiated revaluation
exercises to reflect current market values; and second, hidden values of “latent”
revaluation as a result of long-term holdings of equity securities valued at the historic
cost of acquisition.

General provisions/general financing-loss reserves are created and held against the
possibility of future losses not yet identified at present superfluous although their
eligibility for inclusion in Tier 2 Capital is limited to a maximum of 1.25 percentage
points of risk-weighted assets (if the Standard Approach is used for credit risk) and 0.6
percentage points of credit risk-weighted assets (if the Internal Ratings-Based
Approach is used for credit risk). These provisions or reserves are in general freely
available to cover losses that may subsequently materialise. However, provisions or
reserves designed against identified losses or value deterioration of any asset or any
group of sub-sets of assets, in particular subject to country risk, in real estate financing,
etc., are not eligible to be included in Tier 2 Capital because they are not freely
available to cover unidentified losses that may subsequently arise elsewhere.

Hybrid (debt/equity) capital instruments include a range of capital instruments that
combine characteristics of equity and debt, such as cumulative preference shares.
Although their precise specifications differ from across countries, hybrid capital
instruments are required to be:
• unsecured, subordinated and fully paid-up;
• not redeemable at the initiative of the holder or without the prior consent of the
supervisory authority;
• available to participate in losses without the IIFS being obliged to cease trading; and
• flexible in their service obligations, such as deferment in payment of returns since the
profitability of the IIFS would not support payment.

Subordinated term debt includes traditional unsecured subordinated debt capital
instruments with a minimum orginal fixed term-to-maturity of over five years and limited
life redeemable preference shares. Due to the fixed maturity and inability of these
instruments to absorb losses except in liquidation (not normally available to participate
in the losses of an IIFS), their eligibility for inclusion in the capital base is limited to a
maximum of 50% of Tier 1 Capital and subject to adequate amortisation arrangements.

At the discretion of national supervisors, IIFS may employ Tier 3 Capital (Item 6.8.3),
which shall include short-term subordinated debt for the sole purpose of meeting a
proportion of the capital requirements for market risks but limited to 250% of Tier 1
Capital that is required to support market risks.

For the purpose of calculating the risk-weighted capital ratio, supervisory deductions
(Item 6.8.4) should be made from the capital base. There are two groups of deductions:
• Goodwill and increase in equity capital resulting from a securitisation exposure shall
be deducted from Tier 1 Capital.
• Investments in unconsolidated banking and financial subsidiary companies.
Investments in the capital of other banks and financial institutions, as well as significant
minority investments in other financial entities, shall be deducted 50% from Tier 1
Capital and 50% from Tier 2 Capital, respectively.

See definitions specified in IFSB CAS, IFSB Exposure Draft No. 4, “Disclosures to
Promote Transparency and Market Discipline for Institutions Offering Only Islamic
Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic
Mutual Funds)” and Basel II (Revised June 2006) for further discussion.

Item 6.8.5: Capital Adequacy Ratio

This line item provides elements (Items 6.8.6(a) to 6.8.6(l)) required in the calculation of
the CAR according to both the Standard Formula and the Supervisory Discretion
Formula as specified in the IFSB CAS, December 2005. While the credit risk-weighted
assets (Item 6.8.6(b)) are represented by the sum of risk-weighted assets for credit risk,
the amount of capital charge or capital requirements is multiplied by the conversion
factor or the reciprocal of the minimum CAR to obtain the amount of risk-weighted
assets for market risk (Item 6.8.6(e)) and operational risk (Item 6.8.6(i)).

Item 6.8.6: Total Risk-Weighted Assets

Total risk-weighted assets represent the sum of credit risk-weighted assets (Item
6.8.5(b)), market risk-weighted assets (Item 6.8.5(e)) and operational risk-weighted
assets (Item 6.8.5(i)). Assets are weighted by factors representing their riskiness and
potential for default.

Item 6.8.7: Number of Large Exposures

This line item refers to one or more credit exposures to the same individual or group of
individuals that exceed a certain percentage of regulatory capital.

SERIES FOR INCOME STATEMENT ANALYSIS

Item 6.8.8: Amount of Net Financing Income

The total amount of financing income, which is equivalent to the conventional “interest
income”, represents the sum of financing income generated from either non-jointly
funded assets (Item 6.8.8(a)) or jointly funded assets (Item 6.8.8(b)), using funds of
fund providers – namely, shareholders, IAH and demand deposit account holders
through sales, lease and/or equity financing. The amount of financing income
attributable or distributed to IAH and demand deposit account holders (Item 6.5.5 in
Table 6.5) is equivalent to “interest expense”. The result of financing income generated
minus financing income distributed to IAH and demand deposit account holders is net
financing income, which is equivalent to “interest margin”.

Item 6.8.9: Amount of Investment Income

The total amount of investment income represents the sum of investment income
generated using funds from all fund providers – namely, shareholders (Item 6.8.11(a)),
IAH (Item 6.8.11(b)) and demand deposit account holders (Item 6.8.11(c)).

Item 6.8.10: Amount of Profit Distributed to IAH

The total amount of profit distributed to IAH represents the sum of profit distributed out
of financing, fee-based and investment income generated using PSIA funds, both
restricted and unrestricted. Nonetheless, the amount of profit distributed to unrestricted
IAH from commingled funds needs to be separately disclosed. The amount of profit
distributed to restricted IAH may be specifically disclosed in the statement of restricted
investments.

Item 6.8.11: Amount of

SharÊ’ah non-compliant income

SharÊ’ah non-compliant income may arise from unlawful transactions or prohibited
activities. Please refer to Chapter 6, Section 6.1 for further discussion.

SERIES FOR BALANCE SHEET ANALYSIS

Item 6.8.12: Amount of Liquid Assets

In general, liquid assets comprise assets that are readily available to meet any demand
for cash. Liquid assets usually consist of assets maturing within one year, held either in
cash or near cash equivalents – that is, readily convertible into cash with little or no loss
of value. Amount of broad liquidity assets (Item 6.8.12(a)) may comprise (i) currencies,
(ii) deposits and other financial assets available on demand or within at most three
months (while deposits of an IIFS with other IIFS within the reporting population are
excluded), as well as (iii) securities traded in liquid markets, readily convertible into
cash, with insignificant risk of change in value under normal circumstances. Amount of
core liquid assets (Item 6.8.12(b)) consists of only (i) and (ii) of the definition for broad
liquid assets.

Item 6.8.13: Amount of Short-Term Liabilities

Short-term liabilities are the short-term element (preferably on a remaining maturity
basis within one year, although the original maturity can also be considered as an
alternative) of IIFS’ liabilities and the net (short-term, if possible) market value financial
derivatives position less assets, excluding such liabilities to other IIFS within the
reporting population given the potential importance of financial derivatives to IIFS in
their liquidity analysis.

Item 6.8.14: Amount of Outstanding Sales, Lease and Equity Financing (including
Non-Performing Financing and Specific Provisions)

Financing assets, which encompass sales, lease and equity categories, can be
segmented further by types of contract (Item 6.8.14(a)), economic activities (Item
6.8.14(b)) and geographical distribution (Item 6.8.14(c)).

Item 6.8.15: Amount of Gross Non-Performing Financing (NPF)

Sales, lease and equity financing shall be classified as non-performing when
instalments (principal plus mark-up or profit rate) and other types of regular payments
are past due and unpaid from the first day of default after at least 90 days (3 months) or
any other period of default defined in a jurisdiction. Although national practices may
vary, the 90-day period is the most widely used practice across countries to determine
whether a financing is non-performing.

In certain jurisdictions, the definition of NPF may vary according to the type of
underlying contract. For instance, in Sudan, the period of default starts after 30 days of
overdue for Murabahah financing and 90 days for all other modes of financing. In any
case, the Compilation Guide considers the 90-day criterion as an outer bound without
any intention to discourage more stringent approaches under national supervisory
guidance.

All mark-up or profit rate accrued from the date the financing is classified as NPF shall
be suspended and credited into the “income-in-suspense” account. Suspension of
mark-up or profit rate on a NPF commences from the date it is classified as non-
performing. Mark-up or profit rate earned on a NPF shall be recognised as income on a
cash basis – that is, only when it is received. The amount of financing recorded as non-
performing is equivalent to the amount recorded on the balance sheet and not just the
amount that is overdue.

A NPF can be reclassified as performing once total instalments in arrears fall below the
stipulated period of default. Upon reclassification, mark-up or profit rate can be
recognised as income on an accrual basis. Given the huge variety of country practices,
the Compilation Guide recommends compilation and dissemination of metadata
describing the practice adopted.

Items 6.8.16 and 6.8.17: General Provisions or General Allowance and Specific
Provisions or Specific Allowance for Sub-standard, Bad and Doubtful Financing

In general, provisions are set aside in a specified percentage of total outstanding
financing for sub-standard, bad and doubtful NPF. This classification of the quality of

earning assets, whose definition may vary across jurisdictions, reflects potential losses
of each category of NPF. A general provision/allowance (Item 6.8.16) is set aside when
potential losses are known to exist but their assignment to individual financing is not
possible. A specific provision/allowance (Item 6.8.17) is set aside when potential losses
are identified for an individual financing or for losses of a pool of collectively assessed
small financings with common characteristics.

While general provisions are similar for all categories of the quality of earning assets,
the level of specific provisioning to be set aside increases from sub-standard NPF to
bad NPF. Sub-standard NPF entails more than a normal risk of loss due to certain
adverse factors such as delays in debt servicing, unfavourable financial conditions and
insufficient security, but is not considered as doubtful or bad. An NPF is doubtful when
the collection in full is improbable and, hence, there is a high risk of ultimate default. An
NPF is classified as bad when it is deemed as uncollectible and worthless, on the basis
of relevant circumstances. A bad NPF should be written off.

Item 6.8.18: Amount of Net Non-Performing Financing

Net NPF is calculated by deducting the value of specific provisions or allowances for
sub-standard, bad and doubtful financing (Item 6.8.17) from the amount of gross NPF
(Item 6.8.15).

Items 6.8.19 and 6.8.20: Total Foreign Currency-Denominated Financing and
Funding (Ex-Shareholders’ Equity)

Foreign currency-denominated financing and funding (ex-shareholders’ equity) are
represented by assets and liabilities payable in a currency other than the domestic
currency, as well as those payable in domestic currency but with the amounts to be
paid linked to a foreign currency (foreign currency-linked financing and funding).

Items 6.8.21, 6.8.22 and 6.8.23: Total Equity Net Open Positions, Total Foreign
Exchange Net Open Positions; and Total Commodity Net Open Positions

The line items involving net open positions may help indicate the level of exposure of
IIFS to equity (Item 6.8.24), foreign exchange (Item 6.8.25) and commodity (Item
6.8.26) risks, accordingly.

Item 6.8.24: Total Value of

SukËk Positions

This line item represents total value of sukËk available-for-sale, held for trading and
held-to-maturity as at the reporting date.

CHAPTER 7: METHODOLOGIES OF AGGREGATION AND CONSOLIDATION OF
DATA

285. It is crucial for reporting organisations to determine the appropriate level of
consolidation and aggregation of data through consultation with stakeholders, since the
scope of data consolidation and aggregation could have important implications for the
analysis of PSIFIs. This decision requires a balancing act between the reporting burden
on data suppliers and the potential additional value of data reported on an appropriately
aggregated and/or consolidated basis.

286.

Indeed, consolidation may result in losses of a significant amount of information

of importance to users and risks masking particularly strong or poor performance in
specific areas of operation. The appropriate level of aggregation and/or consolidation
may vary according to each category of PSIFIs.

7.1

CONCEPTS AND PRINCIPLES FOR AGGREGATION AND CONSOLIDATION

287. The following concepts and definitions constitute the skeleton of the Compilation
Guide, especially for constructing sectoral financial statements comprising balance
sheets and income and expense statements.

Institutional units, institutional sectors, and sectors by economic activities

I. Institutional

units

288. Institutional units are fundamental economic units or transactors, in their own
right and on their own behalf, capable of owning goods and assets, incurring liabilities,
and engaging in a full range of economic activities and transactions with other units.
Being centres of legal responsibility, institutional units are centres of decision-making for
all aspects of economic life.

289. Institutional units and their members fulfil various economic functions, such as
to produce, consume, save, invest

, etc. The four main attributes of institutional units,

as listed in the SNA 1993, are as follows:

(a) An institutional unit is entitled to own goods or assets in its own right; hence, it

is able to exchange ownership of goods and assets through transactions with
other institutional units.

(b) An institutional unit is able to make economic decisions and to engage in

economic activities for which it is held responsible and accountable by law.

obligations or future commitments, and to enter into contracts.

(d) Either a complete set of accounts, including a balance sheet, exists for the unit,

or it would be possible and meaningful, from both an economic and legal
viewpoint, to compile a complete set of accounts if they were to be required.

290. There are two main types of institutional units, namely:

100

(a) persons/individuals or groups of persons in the form of single or multi-person

households; and

(b) legal or social entities, whose existence is recognised by law or society

independently of persons or other entities that may own or control the former.
Such units are responsible and accountable for the economic decisions or
actions they take, although their autonomy may be constrained to some
extent by other institutional units.

II. Institutional

sectors

291. On the basis of their principal functions, behaviour and objectives, similar
kinds of institutional units are grouped together to form five mutually exclusive
institutional sectors, as follows:

(a) financial corporations and quasi-corporations sector for institutional units

that are principally engaged in financial intermediation, or in facilitating
financial intermediation, or in auxiliary financial activities;

(b) non-financial corporations and quasi-corporations sector for institutional

units that are principally engaged in the production of market goods and
non-financial services;

(c)

general government sector for institutional units comprising mainly

central, state and local government units, as well as social security
funds, that principally produce non-market services (and possibly goods
as well) for individual or collective consumption and redistribute income
and wealth apart from fulfilling their political responsibilities;

(d) non-profit institutions serving households (NPISHs) for legal entities that

are principally engaged in the production of non-market services (and
possibly goods as well) for households and whose main resources are
voluntary contributions by households; and

(e) households sector for all physical persons in the economy who principally

supply labour in exchange for final consumption. As entrepreneurs,
households are engaged in the production of market goods and non-
financial (and possibly financial as well) services. A household as an
institutional unit may consist of at least one individual.

292. These five institutional sectors or groups of institutional units make up the total
economy. Each of these sectors may be divided into sub-sectors, depending upon the
type of analysis to be undertaken, the needs of policy-makers, the availability of data,
and the economic circumstances and institutional arrangements within a country. For
example, the financial corporations sector can be broken down into the public financial
corporations, domestically controlled private financial corporations and foreign-controlled
financial corporations sub-sectors. Any sub-sector is composed of institutional units,
which may belong to only one sub-sector.

293. Given the focus of the Compilation Guide on Islamic banking and near-banking
statistics, it is noteworthy to distinguish the sub-sectors of the financial corporations
sector as defined in the SNA 1993 as follows:

(a) the central bank;

101

(b) other depositary corporations, which include deposit money corporations

and others;

funds;

(d) financial auxiliaries; and
(e) insurance corporations and pension funds.

294. The Compilation Guide is particularly interested in the “Other depositary
corporations” sub-sector, which comprises all resident financial corporations and quasi-
corporations except the central bank, whose principal activities are financial
intermediation and which have liabilities in the form of deposits or close substitutes for
deposits in the form of financial instruments (e.g. short-term certificates of deposits) in
mobilising financial resources and which are included in measures of national definition
for broad money. For further discussion, please refer to Chapter 2, Section 2.2 and
Chapter 3, Section 3.2.

III. Sectors by economic activities or industries

295. Economic activities are performed by entities with a legal and operational
structure of their own. The establishment is the most widely used observation unit in a
large variety of economic statistics, including the production accounts of the SNA 1993.
Combining both the kind-of-activity dimension and locality dimension, an establishment
is defined as an enterprise (or part of it), situated in a single location, which performs
only a single (non-ancillary) productive activity or whose principal productive activity
accounts for most of the value added.

296. Conceptually, establishments as defined in the ISIC are quite distinct from
institutional units in the SNA 1993, since an establishment is not an entity capable of
owning goods or assets in its own right or of receiving or disbursing income.
Establishments are designed to be statistical units, which provide data that are more
appropriate for analyses of production to make up the supply and use tables of the SNA
1993. If an institutional unit contains only a single establishment, both the institutional
unit and establishment coincide in so far as the production account for the latter is the
same as that for the former.

297. An industry comprises a group of establishments or all production units that fall
within a single class of ISIC; hence, they are engaged in the same or similar types of
activities as defined in the ISIC, the standard industrial classification developed by the
United Nations according to principal productive economic activities by industry, used in
the SNA 1993 and other macrostatistical systems.

298. As such, the ISIC is the presentation of this set of activity categories in such a
way that entities are classified according to the kinds of economic activities they carry
out or the types of production they engage in; hence, it is not a classification of goods
and services.

299. However, the ISIC is not intended to measure output data at any detailed level
since it is not possible, even in principle, to establish a one-to-one correspondence
between economic activities and products. The ISIC does not differentiate between

102

market and non-market activities, although this distinction is emphasised in the SNA
1993. The broad sectors by industry, as identified in the ISIC, Revision 4 (December
2005), are:

(a)

agriculture; forestry, hunting and fishing;

(b)

mining and quarrying;

(c)

manufacturing;

(d)

electricity; gas; steam and air-conditioning supply;

(e)

water supply; sewerage; waste management and remediation activities;

(f) construction;
(g)

wholesale and retail trade; repair of motor vehicles and motorcycles;

(h)

transportation and storage;

(i)

accommodation and food service activities;

(j)

information and communication;

(k)

financial and insurance activities;

(l)

real estate activities;

(m)

professional, scientific and technical activities;

(n)

administrative and support service activities;

(o)

public administration and defence; compulsory social security;

(p) education;
(q) human health and social work activities;
(r)

arts; entertainment and recreation;

(s)

other service activities;

(t)

activities of households as employers; undifferentiated goods-and-
services-producing activities of households for own use; and

(u)

activities of extraterritorial organisations and bodies.

Economic territory and centre of economic interest

Economic territory of a country

300. The economic territory of a country consists of the geographic territory
administered by a government within which persons, merchandise, services and capital
circulate freely.

301. The economic territory of a country includes the airspace, territorial waters and
continental shelf lying in international waters over which the country enjoys exclusive
rights or claims to have jurisdiction, as well as enclaves or structures in the rest of the
world, such as clearly demarcated land areas located in other countries and used by the
government that owns or rents them for diplomatic, military, scientific or other purposes
with the formal political agreement of governments. The economic territory also includes
free zones and bonded warehouses or factories operated by offshore companies under
customs controls.

II. Centre of economic interest

302. An institutional unit has a centre of economic interest within a country if the unit
engages or intends to continue engaging, either indefinitely or over a finite but long

103

period of time, in economic activities and/or transactions on a significant scale on or from
some location, dwelling, place of production, or other premises within the economic
territory of a country.

303. In most cases, it is reasonable to assume that an institutional unit has a centre of
economic interest in a country if it has already engaged in economic activities and/or
transactions on a significant scale for at least one year, or if the unit intends to do so.
The one-year period should only serve as a guideline and not as an inflexible rule.

Flows, stocks and positions

304. It is necessary to identify what kinds of financial transactions done by IIFS may
be associated with claims on and liabilities to residents and non-residents. All underlying
data of PSIFIs are in the form of either stocks or flows.

I. Flows

305. Flows are monetary expressions of economic actions undertaken by institutional
units and any other events that take place during an accounting period which could
affect the economic status of institutional units. Flows reflect the creation,
transformation, exchange, transfer or extinction of economic value, causing changes in
the volume, composition or value of an institutional unit’s assets, liabilities and net worth.

306. Flows can be classified either as transactions or other economic flows:

(a) Transactions represent interactions between institutional units by mutual

agreement or actions analytically useful to be treated like transactions within an
institutional unit, often because the unit is operating in two different capacities,
involving goods, services, income, transfers, and non-financial and financial
assets.

(b) Other economic flows represent changes in the volume or value of an asset of

liability that do not result from transactions. Volume changes are other changes
in the volume of assets,such as losses due to extraordinary events, while value
changes are holding gains and losses arising from price or exchange rate
movements.

307. In practice, total recorded flows during a period can be divided into three
separate components:

(a) Transactions – that is, financial flows that arise by mutual agreement between

institutional units, from the creation, liquidation or change of ownership of
financial assets or liabilities. Changes of ownership may occur through the sale,
transfer or other discharge of all rights, obligations and risks associated with a
financial asset or liability.

(b) Revaluations – that is, financial flows arising from changes in prices of financial

assets and liabilities and/or the exchange rate that may affect the domestic
currency values of assets and liabilities denominated in foreign currencies.

arise from asset and liability changes other than those arising from transactions
and revaluations, including write-off claims, reclassification of assets,

104

monetisation or demonetisation of gold, allocation or cancellation of SDRs, and
other events.

II. Stocks

308. Stocks are positions in or holdings of assets and liabilities of an institutional unit
at a specific time and the unit’s resulting net worth. In this Compilation Guide, flows and
stocks are parts of an integrated system whereby all changes in stocks can be explained
by a relationship with the flows according to the following equation:

S¹ = S

+ F

where S¹ represents the value of a specific financial stock at the beginning of an
accounting period
S

represents the value of a specific financial stock at the end of an accounting

period
F represents the net value of all flows during the period

309. In general, stocks are closely linked to flows, since the value of any stock held at
any given time is the cumulative value of all flows that may have occurred during the
period to an asset or a liability held since its initial acquisition. As such, changes in
stocks take fully into account all prior flows (entries and withdrawals plus other changes,
either in volume or in value) recorded between periods.

Table 7.1: Example of flows and stocks for a financial asset or liability

Flows or stocks

Sub-total

Total

Opening stock (beginning of period)

100

1. Transactions (+/-)

+10

2. Revaluations (+/-)

(a) Arising from price changes

-3

(b) Arising from exchange rate changes

3. Other changes in the volume of assets (OCVA) (+/-)

-6

Closing stock (end of period)

106

310. In this example, opening stock refers to the value of the outstanding stock of a
category of financial assets or liabilities at the beginning of an accounting period. Closing
stock refers to the value of the outstanding stock of a category of financial assets or
liabilities at the end of an accounting period, which is equivalent to the value of the
opening stock plus flows arising from transactions, revaluations and OCVA.

III. Positions

311. Positions refers to the value of outstanding stocks of financial and non-financial
assets and liabilities held at one point in time, usually at the reference date of the
balance sheet by each institutional unit or institutional sector or the economy as a whole.

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312. Assets and liabilities are the components of the balance sheets of the total
economy and institutional sectors. A balance sheet is a statement, drawn up at a
particular point in time, presented with liabilities and net worth on the right side and
assets on the left. Net worth is the difference in value between all financial and non-
financial assets owned by an institutional unit or an institutional sector and outstanding
liabilities – that is, the balancing item of a balance sheet. As such, net worth cannot be
measured independently of other entries and it does not relate to any specific set of
transactions.

313. Financial assets are entities over which ownership rights are enforced by
institutional units and from which economic benefits may be derived in the form of
holding gains or property income. The fact that there is a counterpart liability of another
institutional unit distinguishes financial assets from other types of assets in the SNA
1993.

314. Non-financial assets are entities over which ownership rights are enforced by
institutional units, individually or collectively, and from which economic benefits may be
derived by their owners by holding or using them over a period of time. Non-financial
assets consist of tangible assets, both produced and non-produced, as well as intangible
assets for which no corresponding liabilities are recorded.

315. Produced assets comprise non-financial assets that have come into existence as
outputs from production processes, including fixed assets, inventories and valuables
(assets acquired and held primarily as stores of value). Non-produced non-financial
assets are both tangible (e.g. land, subsoil assets, water resources and non-cultivated
biological resources) and intangible (e.g. patents, leases and purchased goodwill) assets
that come into existence other than through processes of production.

316. Although they may fulfil other functions, financial assets are directly stores of
value, while most non-financial assets generally serve two purposes, as objects usable
in economic activities and as stores of value.

Residence vs. non-residence

317. The delineation between resident and non-resident entities is a key feature of all
macrostatistical systems, including the PIFS. The concept and coverage of residence in
this Compilation Guide are identical to those in the SNA 1993 and BPM5. The total
economy is defined as the entire set of resident institutional units, which are aggregated
into institutional sectors.

I. Residence

318. An institutional unit is considered as resident within the economic territory of a
country if it maintains a centre of economic interest in that territory – that is, it engages,
or intends to engage, in economic activities or transactions on a significant scale either
indefinitely or over a long period, usually interpreted as being at least one year as a
practical guideline. Therefore, residence is not based on nationality or legal criteria. This
concept is identical to that used in the SNA 1993 and the IMF’s MFSM, among others.

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319. Employees of international organisations are residents of the domestic
economies in which they live and engage economic activities, and not of the enclaves in
which they work. Military personnel or civil servants (including diplomats) employed
abroad in government enclaves such as military bases and embassies continue to have
their centre of economic interest in their home countries.

320. Corporations and quasi-corporations have a centre of economic interest and are
residents of a country where they intend to engage in significant amounts of production
of goods and services, or in which they own land and structures (including at least one
production establishment) for an indefinite or long period of time.

321. In the Compilation Guide, the residency concept is important because the
residency status of data suppliers could affect the aggregation and consolidation
methods of data. In general, the residence of the parent determines the residence of an
IIFS group. However, a branch or a subsidiary is resident in the economy in which it is
ordinarily located if it operates and engages in economic activities from that location, as
opposed to the location of its parent.

322. For the purpose of compiling PIFS, residence should refer to the location of an
IIFS (be it branches, subsidiaries or headquarters) in determining the extent of data
collection. Since IIFS are residents of a country in which they are ordinarily located,
domestically located branches, subsidiaries or headquarters which operate or engage in
economic activities and transactions from that location are resident of the economy
regardless of the residence of their parents.

323. Headquarters, subsidiaries and branches of domestically controlled IIFS, as well
as subsidiaries and branches of foreign-controlled IIFS, are all residents as long as they
are domestically located and operate from that location.

324.

Although “offshore” IIFS may be required to comply with different regulatory

regimes as opposed to “onshore IIFS”, offshore IIFS are also residents of the economy
in which they are ordinarily located.

II. Non-residence

325.

Non-resident institutional units are residents abroad – that is, of other economies

who form the rest of the world. Transactions that resident units engage in with non-
resident units are considered as external transactions of the economy and are grouped
in the account of the rest of the world. In brief, the rest of the world represents the
account of transactions occurring between resident and non-resident units or, from
another perspective, the whole of non-resident units that enter into transactions with
resident units.

Subsidiaries, associates, joint ventures and branch offices

326. For a better understanding of the concept of aggregation and/or consolidation of
PIFS, the Compilation Guide recommends looking into the definitions of subsidiaries,
associates, joint ventures and branches.

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I. Subsidiaries

327. Subsidiaries are corporations over which a parent has established control – that
is, the ability to determine general corporate policy by choosing or removing appropriate
directors so as to obtain benefits from the activities of the subsidiaries. Subject to
possible variations in national practice, this control is explicitly established through
ownership of more than 50% of the voting shares or otherwise through the control of
more than 50% of shareholders’ voting power. For example, Corporation B, more than
50% of whose shareholders’ voting power is controlled by Corporation A, is a subsidiary
of Corporation A, the parent corporation.

328. Given the basis of control to define the subsidiary–parent relationship rather than
ownership, this relationship must be transitive. For example, if C is a subsidiary of B, and
B is a subsidiary of A, then C is also a subsidiary of A. Foreign subsidiaries must adhere
to the laws of the country in which they operate, although the parent corporation
consolidates financial records of its subsidiaries.

II. Associates

329. Associates, as opposed to subsidiaries, are corporations over which the investor
has a significant degree of influence that is usually assumed to arise when the investor
owns between 10% or 20% (depending on variations in national practice) and 50% of
the equity or voting power. For example, Corporation B, between 10% and 50% of
whose shareholders’ voting power is controlled by Corporation A and its subsidiaries, is
an associate of Corporation A.

330. By definition, a parent corporation is able to exert less influence over the
corporate policy and management of its associates compared to its subsidiaries.

331. In general, the equity investment continues to be classified as an associate,
although the ownership stake reaches the subsidiary threshold if the situation is
expected to be temporary. However, the Compilation Guide recommends a change in
the classification of the equity investment to associate if the ownership stake reaches or
breaches the subsidiary threshold for two consecutive reporting periods.

III. Joint

ventures

332. A joint venture, often abbreviated as JV, is an independent legal entity owned
and operated by at least two parties or JV partners for their mutual benefit. In that newly
created entity to which JV partners contribute equity, they also agree to share the
control, capital, technology, human resources, revenues, expenses, risks and rewards in
undertaking an economic activity. A JV can be for one specific project only, or a
continuing business relationship.

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333. The Compilation Guide classifies JVs either as subsidiaries or associates, or
neither, depending on the criteria outlined to qualify as either one. For instance, if each
JV partner has a significant degree of influence over the JV, the entity should be
classified as an associate.

IV. Branch offices

334. A branch office is part of the legal entity under which it operates and has its own
organisation and administration. It underwrites business for its assigned territory, has its
own balance sheet and is subject to local regulations.

Types of control and/or ownership

335. Branch offices, subsidiaries or headquarters of an IIFS group may be classified
according to types of ownership and/or control – that is, they may be privately owned
and/or controlled, publicly owned and/or foreign-controlled and domestically controlled,
among others. However, for the purpose of aggregation and consolidation of PIFS, the
Compilation Guide focuses on domestically controlled and foreign-controlled IIFS.

Domestically controlled IIFS

336. IIFS resident of a country are defined as domestically controlled if they consist
of headquarters, subsidiaries and/or branches of a domestically incorporated parent
IIFS. Domestically controlled IIFS are subject to supervision by the national supervisory
authority. In rare cases where a parent IIFS is considered as being located in both the
domestic and foreign country, national compilers are encouraged to classify it as
domestically controlled.

II. Foreign-controlled

IIFS

337. IIFS resident of a country are defined as foreign controlled if they consist of
headquarters, subsidiaries and/or branches of a foreign parent IIFS. In addition to
supervision by the host supervisory authority, foreign-controlled IIFS are usually subject
to supervision by the home supervisory authority of their parents as per the
recommendation in the Basel Concordat of May 1983 (BCBS, 1983).

Guidance provided by this criterion should help determine the category in which an IIFS
falls. For example, if a resident IIFS is controlled by a bank holding company
incorporated in a foreign country, it should be classified as foreign controlled.

7.2

AGGREGATION, CONSOLIDATION AND NETTING ISSUES

338. The analysis and use of PSIFIs may be affected by the extent to which the
underlying data used for their calculation are aggregated and/or consolidated. This
section intends to arrive at generic definitions for aggregation, consolidation and netting,
as well as the issues surrounding these concepts.

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Aggregation

339. Aggregation refers to the summation of positions and flow data across all
reporting units within a particular group (sector or sub-sector) and, for a given sub-
sector, the summation of positions and flow data within a particular asset or liability
category. With aggregation, total positions and flow data for any group of reporting units
equals the sum of gross information for all individual reporting units in the group. As
such, the group and sub-group totals equal the sum of their component elements, while
intra-group claims and liabilities between group members are preserved.

340. Disaggregation refers to the practice of breaking down a set of macrostatistics
into sectors or a sector into sub-sectors. The first level of disaggregation is usually the
breakdown into the main categories of a sector – that is, sub-sectors; the second level
could be a breakdown by the nationality of parent corporations, etc.

341. Underlying data series compiled for the purpose of PSIFIs have to be arranged in
a manageable number of analytically useful groups by crossing two or more
classifications. For example, a classification of institutional sectors or sectors by
economic activities/industries is crossed with the classification of transactions, other
flows or assets. Furthermore, resources must be distinguished from uses, and assets
from liabilities. For more detailed analysis, these classes may be further sub-divided or
disaggregated.

342. For analytical purposes, data are collected at the lowest level of details and
aggregated into higher-level totals. Conceptually, the value for each level of aggregation
is the sum of the values for all the elementary items in the relevant category. However,
in practice, other estimation methods may be required to arrive at an aggregate value.

Consolidation

344. Consolidation, which may cover various accounting procedures and arise at
various levels of grouping, is a method of presenting statistics for a set of institutional
units as if they formed a single unit, or for a set of any other dimensions into a single one
since data presented for a group of units are usually consolidated.

345. Consolidation, which should be distinguished from other types of netting,
generally involves the elimination of transactions (both from uses and resources) that
occur between institutional units within the same institutional sector or sub-sector and
the elimination of reciprocal financial assets and liabilities.

346. Consolidation is a special kind of cancelling out of flows and positions that arise
from financial claims and corresponding obligations between institutional units that are
grouped together within the same institutional sector or sub-sector for statistical
purposes, resulting in an outcome that shows only the institutional sector’s or sub-
sector’s claims on and liabilities to other sectors or sub-sectors.

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347. Take one IIFS that subscribes to a sukËk issuance by another IIFS as an example
of the elimination of intra-sector transactions – that is, all transactions that take place
among institutional units within the same institutional sector or sub-sector. If the data on
this transaction between the two institutional units of the same institutional sector are
consolidated, then the stock of sukËk held as assets and liabilities are reported as if the
sukËk did not exist.

348. In general, for institutional units, all intra-unit positions and flows are eliminated,
while only positions and flows with other institutional units are recorded. For institutional
sectors or sub-sectors, flows between constituent institutional units are not consolidated.
However, statistics on a consolidated basis within each group of institutional units or
sector may be necessary for complementary presentations and analyses.

349. The SNA 1993 recommends a non-consolidation of statistics of institutional units
– that is, transactions between two establishments within the same institutional unit
should not be consolidated. According to consolidation principles, statistics for the
reporting institution and all of its controlled entities are usually presented on a
consolidated group basis to give a picture of all operations and financial positions of a
parent and its subsidiaries as if the group of entities were a single unit.

350. As such, an institutional unit consisting of a headquarters office, subsidiaries and
branch offices should report stock and flow data consolidated across all offices of the
institutional unit – that is, operations and financial positions of a parent and its
subsidiaries and branch offices are consolidated as though the group of entities were a
single unit.

Netting

351. Netting refers to offsetting uses against resources outside the context of
consolidation of various institutional units

. Individual institutional units or institutional

sectors may have the same kind of transactions as a use or a resource, and the same
kind of financial instrument both as an asset and as a liability. There are two types of
recordings, namely:
a) Gross recordings are combinations whereby all elementary items are

shown at their full value.
b) Net recordings are combinations whereby the values of some

elementary items are offset against items on the other side of the

account or which have an opposite sign.

352. Netting must be distinguished from consolidation, whereby netting financial
assets against liabilities (changes in financial assets vs. changes in liabilities) is to be
avoided in particular. Claims on a particular transactor or group of transactors should not
be netted against the liabilities to that transactor or group of transactors. For example,
an IIFS may have an outstanding Murabahah financing to a customer who is also one of
its current account holders. The asset of the IIFS – that is, the financing amount – should
not be netted against the liability – that is, the current account balance of the customer.

353. As a general principle, the collection and compilation of data should be on a
gross basis. However, there are exceptions to the general rule whereby, in some

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circumstances, the presentation and compilation of data on a net basis is appropriate, or
the netting of data is required simply because data on a gross basis are not available.
Whenever data are presented on a net basis, the underlying data on a gross basis
should also be shown.

354. Netting in the sense of recording transactions on a purchase-less-sales basis –
that is, net acquisition of a specific category of financial assets or liabilities – should be
employed. For example, financing transactions should be defined as the amount of new
financing contracts less financing repayments, or sukËk transactions as the amount of
sukËk purchased less the amount of sukËk redeemed or sold.

7.3

GUIDANCE ON AGGREGATION AND CONSOLIDATION OF DATA

355. Consolidation and aggregation can be combined for the purpose of compiling
underlying data series from which PSIFIs are to be derived. For example, reporting IIFS
or data suppliers may furnish consolidated data series to national compilers. These data
series will then be aggregated at the sector level by national compilers to arrive at totals
for the relevant sector.

356. In some instances, some of these sector-level data are to be consolidated rather
than aggregated, and perhaps some adjustments may be required. In this case, data
suppliers need to report to national compilers intra-sector positions and flows among
entities in the sector so that such positions and flows can be eliminated. In principle,
there are two main approaches for the compilation of underlying data series of PSIFIs –
namely, the resident aggregated-based approach and the consolidated-based approach.
Further guidance for the purpose of PIFS compilation will be discussed extensively in
Chapter 8.

357. At present, very few domestically incorporated IIFS have cross-border operations
or overseas subsidiaries/branches, although the situation is rapidly changing. Moreover,
central banks/monetary authorities have expressed a preference for data compilation
based on the domestically consolidated method, at least for the initial stage, as revealed
by the Survey on Compilation and Dissemination Practices of Islamic Finance Statistics.
However, these considerations should be balanced against the need to ensure
consistency of the consolidation method for PSIFIs with that for the IMF’s FSIs.

358. While the Compilation Guide recommends data compilation on a cross-border
consolidated basis for domestically controlled IIFS with international operations, being
the most appropriate approach for financial soundness analysis, it also recognises that
the domestically consolidated method for PSIFI compilation may prove useful, as it
provides the macroeconomic links.

Resident aggregated-based approach

359. Under this approach, adopted by the SNA 1993, sectoral balance sheets in the
IMF’s MFSM and other related national accounts-based methodologies like all positions
and flows are consolidated at the group level and reported by IIFS resident in the
economy consisting of headquarters, subsidiaries and branches. The positions and flows

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are then aggregated by national compilers to arrive at totals for each institutional sector
or sector by economic activities.

Consolidated-based approach

360. The consolidated-based approach refers to the data consolidation at both the
group and sector levels. The consolidated group method, which entails elimination of
positions and flows between branches and/or subsidiaries within a group, is undertaken
by IIFS; while consolidated sector-level data compilation, which involves elimination of
transactions and positions among entities within a sector, is carried out by national
compilers.

361. Based on the concept of control by a parent of other operating units, which is
fundamental for banking supervision (BCBS, 1997, No. 20), the Compilation Guide
recommends this approach to prevent double counting of income and assets arising
from intra-group activities, as well as to preserve the integrity of capital in IIFS by
eliminating double counting (gearing) of capital (BCBS, 2001b).

362. The Compilation Guide distinguishes four broad categories of consolidation
method: group consolidated, cross-sector consolidated, domestically consolidated and
cross-border consolidated. While cross-border consolidated data will not distinguish
between banking activities carried out in domestic and foreign economies, domestically
consolidated data will not capture exposures to risks through overseas subsidiaries
and/or branches. For jurisdictions with no or an insignificant number of internationally
active banks, the consideration for capturing exposures to risks through overseas
operations becomes less pressing.

Consolidated group reporting

363. Consolidated group reporting by resident IIFS entails consolidation of data on the
activities of headquarters, subsidiaries and branches at the group level while
eliminating intra-group flows and positions (including capital and reserves) – that is,
flows and positions between these entities are reported in the same group but the
reports are separately incorporated or the offices are reported as separately
incorporated entities.

II. Domestically controlled, cross-sector consolidated method

364. This method should entail consolidation of information from all branch offices and
subsidiaries involved in activities of any other IFSI components in addition to banking
and near-banking services (please refer to Chapter 2, Section 2.1 for further discussion)
with that of the domestically controlled and incorporated parent IIFS. Being the
method employed in the Basel Capital Accord (although insurance is typically excluded),
most supervisory data are based on this form of consolidation.

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365. Although this method could highlight financial strengths and weaknesses of an
IIFS group in the context of the full range of financial activities, the clarity of the
institutional sector’s information is diminished due to the inclusion of flows and positions
from institutional units outside of the institutional sector. In periods of mergers and
acquisitions between institutional units in different institutional sectors, interpretation of
data consolidated using this method could prove problematic. Besides, the scope of
activities for the purpose of determining institutional and data coverage may not be
straightforward.

III. Domestically consolidated method or national residency consolidation

basis

366. This method consists of consolidation of positions and flows of resident IIFS –
that is, of domestically located and operating headquarters, subsidiaries and branches of
domestically controlled and incorporated

parent IIFS and of domestically located

and operating subsidiaries and/or branches of foreign parent IIFS in a reporting
country. Reporting IIFS will submit flows and positions with residents and non-residents.

367. Since all resident IIFS, either domestically controlled or foreign controlled, will be
affected by the conduct of monetary policy of central banks/monetary authorities, the
domestically consolidated (DC) method provides a link to other macrostatistics such as
national accounts and monetary aggregates, underscoring the analytical significance of
this method.

368. Indeed, the interconnections between domestically consolidated data and
macroeconomic data series could provide significant support to macroprudential
analysis. Nonetheless, this method does not identify or monitor risks to which domestic
parent IIFS are exposed through their overseas branches and/or subsidiaries.

IV. Domestically controlled, cross-border consolidated method

369. The domestically controlled, cross-border consolidated (DCCBC) method entails
consolidation of positions and flows of domestically located headquarters, subsidiaries
and/or branches with their overseas subsidiaries and/or branches of domestically
controlled and incorporated parent IIFS

, which is consistent with the required

consolidation method as specified for the IMF’s FSIs and with the method of
consolidated international banking statistics adopted by the BIS.

370. The focus on the financial soundness of domestically controlled and incorporated
IIFS, especially those with overseas subsidiaries and/or branches, is crucial since the
failure of such large IIFS groups could pose a systemic risk and national authorities may
be required to provide financial support.

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V. Cross-border consolidated method or global consolidation basis

371. This method, which is equivalent to the combination of the DC and DCCBC
methods, consists of consolidation of positions and flows of resident IIFS (consolidation
based on national residency basis) – that is, of domestically located and operating
headquarters and/or subsidiaries and/or branches of both domestically controlled and
incorporated parent IIFS as well as foreign parent IIFS

with overseas subsidiaries

and/or branches of domestically controlled and incorporated parent IIFS.

372. The focus is on the financial soundness of domestically incorporated IIFS,
regardless of the location of their business, as well as all SharÊ’ah compliant banking and
near-banking operations that exist in a country. The global consolidation will enable
central banks/monetary authorities and/or relevant supervisory authorities to capture
information on risks and financial exposures on a worldwide basis, as opposed to the
national consolidation method, which focuses on IIFS operations within national
boundaries.

VI. Foreign-controlled, cross-border consolidated method

373. This method consists of consolidation of positions and flows of domestic and
overseas subsidiaries and/or branches with their domestically incorporated foreign-
controlled parent IIFS

. Monitoring the performance of foreign-controlled subsidiaries

and branches, as well as their parents by nationality, could be necessary, depending on
country circumstances. Any policy decisions of their parents could have implications for
activities of subsidiaries and branches in the host economy.

374. Although foreign and domestic-controlled IIFS could be viewed differently from
prudential and regulatory perspectives by host supervisory authorities, they should be
apprehensive of the soundness of these IIFS given the potential impact of their activities,
as well as the financial risks stemming from their subsidiaries and branches on the
domestic economy.

Domestically consolidated vs. cross-border consolidated

375. As noted earlier, the Compilation Guide recommends the domestically controlled,
cross-border consolidated method for PIFS compilation while recognising that the
domestically consolidated method may be useful in certain circumstances and for some
analytical purposes. Therefore, it would be useful to distinguish between what
constitutes domestically consolidated data and cross-border consolidated data, and to
examine possible differences in the way data are produced as a result of different
consolidation methods adopted especially for domestically incorporated IIFS.

376. In a nutshell, cross-border consolidated data do not distinguish the location in
which banking and near-banking activities take place, while domestically consolidated
data do not capture risks incurred through overseas subsidiaries and/or branches of
domestically controlled and incorporated parent IIFS.

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Domestically incorporated IIFS which have no overseas branches and/or

banking subsidiaries and/or associates

377. In these circumstances, data compilation for domestically incorporated IIFS
involves the same process for both methods, since there is no consolidation of flows and
positions with their overseas branches, banking subsidiaries and associates.

378. However, based on the domestically consolidated method, national compilers will
have to compile flows and positions of domestically located and operating branches,
banking subsidiaries and associates of foreign-controlled IIFS.

II. Domestically incorporated IIFS which have no overseas branches and/or

banking subsidiaries but have overseas banking associates

379. In these circumstances, the data compilation process is still the same for both
methods whereby overseas associates are excluded from the reporting population – that
is, the proportionate value of capital and profits of overseas associates are included in
the sectoral information of balance sheet and income and expense.

III. Domestically incorporated IIFS which have overseas branches and/or

banking subsidiaries

380. The difference between the two methods becomes apparent in these
circumstances whereby overseas branches and banking subsidiaries of domestically
incorporated IIFS are included in the reporting population under the cross-border
consolidated, domestically controlled method.

381. On a domestically controlled, cross-border consolidated method, with some
exceptions, gross income and expense flow data and gross balance sheet (and off-
balance sheet) exposures of overseas branches and banking subsidiaries will be
included in the sector data. However, intra-sectoral flows and positions, other than debt
positions and associated interest income flows among unrelated IIFS

are eliminated on

consolidation. For example, financing extended by an overseas branch or an overseas
banking subsidiary to residents of the country in which it is located and operates and/or
to residents in the country of the parent IIFS will be included on a gross basis in the
sector balance sheet, unless the counterparty is another bank in the same IIFS group.

382. In contrast, on a domestically consolidated basis, all gross income and expense
flows and gross claims and liabilities between domestic IIFS and their overseas
branches and banking subsidiaries are included in the sector data. For example,
financing by a domestically incorporated parent IIFS to its overseas branches and/or
banking subsidiaries will be included in financing to non-residents in the sectoral balance
sheet on a gross basis.

383. The impact of these differences on the sector-level data should be rather similar
in the case of either overseas branches or banking subsidiaries, except for subsidiaries
less than 100% owned by the domestically incorporated parent IIFS.

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384. In that case, profits (or losses) and capital at the sector level on a cross-border
consolidated basis are likely to be higher than on a domestically consolidated basis
because these data are included on a proportionate ownership basis for the domestically
consolidated method instead of on a full basis for the former method – that is, the
minority investors’ proportionate ownership of capital and share of the profits is included
in the sector-level data on a cross-border consolidated basis.

385. For example, only 50% of profits (or losses) and capital of a 50%-owned
subsidiary will be included in the domestically consolidated data. However, if the minority
investors are other banking IIFS within the reporting population, the value of their
investment and earnings in the investment are also excluded from the sector-level data
on a cross-border consolidated basis to avoid double counting of income and capital at
the sector level.

IV.

Domestically incorporated IIFS which have subsidiaries and associates in

other sectors

386. In these circumstances, the data compilation process is the same for both
methods except if the investment of the parent IIFS in the subsidiary or associate is held
through an overseas banking subsidiary in which there are minority investors.

387. Since subsidiaries in other sectors are not consolidated with parent IIFS, gross
income and expense flows and gross claims and liabilities between these subsidiaries
and the banking and near-banking segment, as well as the parent IIFS’s proportionate
share of profits, capital and reserves of the subsidiaries, are included in both sets of
data.

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CHAPTER 8: GUIDANCE ON COMPILATION AND DISSEMINATION

388. The Compilation Guide provides descriptions of a matrix showing inter-sectoral
financial transactions for the Islamic banking system of an economy and corresponding
stock data on financial claims and liabilities among sectors. The Compilation Guide
recommends national compilation of underlying data series, where applicable, to be
disaggregated into institutional sectors or sectors by economic activities/industries and
crossed with other dimensions.

389. The sectorisation of economic transactors to distinguish between residents and
non-residents, and then to delineate the various sectors and sub-sectors, is fundamental
to all macrostatistical systems. The Compilation Guide adheres to the sectorisation
principles of the SNA 1993 and to the ISIC, where applicable.

390. The Compilation Guide recommends that the underlying data be compiled on a
domestically controlled, cross-border consolidated basis, being the most appropriate
approach for financial soundness analysis – especially for IIFS with international
operations. The domestically consolidated or national consolidation method can be
considered if national compilers believe it would contribute materially to their financial
stability analysis, especially for its linkages with other macroeconomic information.

8.1 SUMMARY

GUIDANCE

391. The Compilation Guide recommends the underlying data sets from which PSIFIs
are derived – namely, sectoral income and expense statements, balance sheets,
statement of restricted investments (if any) and memorandum series, to be compiled as
aggregated data at the sub-sector or sector level. Indeed, sector-level and sub-sector-
level data on financial assets and liabilities shall be aggregated into major categories –
for example, SharÊ’ah compliant financing classified by types of contracts, or PSIA
classified by types of IAH.

392. Financial positions of flows and stocks between individual institutional units, but
not within an institutional unit, should be reported for PIFS compilation. For sectors and
sub-sectors, flows between constituent units should not be consolidated at the elemental
level of data reporting and compilation. As such, sectoral balance sheets for sub-sectors
of an institutional sector are based on aggregated rather than consolidated data.

393. This section presents a summary of guidance for each of the core and
encouraged PSIFIs – in particular, their definition and sources of underlying data, and
highlights the issues related to their dissemination to the public and, eventually, the
transmission to the IFSB. This summary of guidance, presented as Appendix 2, is
intended to assist national compilers in their compilation exercise by grouping together
various aspects relating to each PSIFI as identified in Chapter 4, Section 4.2 and its
compilation requirements. There could be some cross-referencing between summaries,
as well as to other chapters of the Compilation Guide – in particular, Chapters 4, 5 and
6. Each summary has three major sub-headings:

(a) definition;
(b) sources of data and issues for national compilers; and
(c) type of aggregation and consolidation applicable.

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Definition

394. Under the “definition” sub-heading, the summary will attempt to provide a broad
definition of each PSIFI as well as, where appropriate, guidance on components of its
numerator and denominator and, where applicable, reference to respective line items of
sectoral financial statements and memorandum series as specified in Chapter 6, Section
6.2.

Sources of data and issues for national compilers

395. Under this sub-heading, the summary provides information on various sources of
underlying data – in particular, supervisory and commercial accounting sources, as well
as national accounts, monetary and financial statistics.

396. The summary also attempts to identify practical issues vis-à-vis the PSIFI
compilation. Countries with established systems of compiling and disseminating other
macrostatistics should face less difficulty in doing the same for PIFS.

Type of applicable aggregation and consolidation

397. This sub-heading attempts to recommend the most suitable and applicable
aggregation and consolidation method for each PSIFI. In general, it is assumed that data
from supervisory sources are available on a consolidated basis (although the type of
consolidation needs to be compared to the recommendations in the Compilation Guide),
while national accounts-based sources provide domestic-oriented data.

398. The Compilation Guide recommends consolidated group reporting for IIFS at the
group level, especially for IIFS groups with cross-border operations – that is,
consolidation of SharÊ’ah compliant activities of their overseas subsidiaries and/or
branches with domestic operations since the assessment of soundness should ideally
include the consolidation of financial statements of their domestic and overseas
subsidiaries and branches.

399. As already mentioned, the Compilation Guide requires the domestically
controlled, cross-border consolidated method for compiling PSIFIs and their underlying
data, while separate compilation on a domestically consolidated basis is also desirable if
national compilers believe that such statistics would materially assist their
macroprudential analysis – in particular, for linkages with other macroeconomic
information.

8.2

SOME ISSUES OF PIFS COMPILATION AND DISSEMINATION, AS WELL AS

TRANSMISSION TO THE IFSB

PIFD accessibility: public domain vs. restricted domain

400. The PIFD could serve as a platform for central banks/monetary authorities to
detect signals or monitor emerging trends associated with the soundness and stability of

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the IFSI. The IFSB encourages adherence to the Compilation Guide in the interest of
good practices and statistical comparability. Nonetheless, national differences and rapid
changes in financial markets may necessitate flexible interpretation of the Compilation
Guide.

401. Major user groups of the PIFD may include policy or strategic analysts at central
banks/monetary authorities and IIFS, as well as market analysts at private research
institutions.

402. In principle, the Compilation Guide recommends a publicly available PIFD and
not a highly classified PIFD, with accessibility restricted to only a group of users. Indeed,
ensuring public access to the PIFD could be part of the efforts to promote the IFSI that is
characterised by greater transparency (through disclosure of macroprudential indicators
on an aggregate basis) and high integrity (through homogeneity and comparability of
indicators across countries). Nonetheless, for the purpose of confidentiality, the public
accessibility to the PIFD can be limited to a certain category of PIFS – for instance, the
core set of PSIFIs.

403. In essence, the Compilation Guide recommends that each reporting central
bank/monetary authority make the PSIFIs, especially the core set, available on its own
website, which is accessible to the public.

404. At the same time, the Compilation Guide encourages transmission of PIFS,
including both the PSIFIs and underlying data, to the IFSB to facilitate cross-country
sharing of experiences and development trends. However, the Compilation Guide
acknowledges that the level of preparedness and willingness to publicly disclose core
PSIFIs varies among participating central banks/monetary authorities.

Dimensions of legal backing for statistical compilation

405. Adequate legal backing may provide national compilers with the necessary
support to encourage private sector data suppliers to report the required data for the
calculation of PSIFIs. Terms and conditions of legal support for statistical compilation
may vary across countries, depending on the institutional arrangements and the
historical development of statistical collection, gazetted through legislation (by the
Parliament) or issuance of decrees or other legal acts (by the central bank or the
government).

406. Some typical dimensions of legal backing for statistical compilation include the
following:

(a) scope, which specifies types of entities and the rationale for targeting these

entities;

(b)

flexibility, which allows national compilers to adapt to new developments;

penalties on entities upon failure to report;

(d)

confidentiality, which prohibits individual entities from using the information other
than for statistical compilation purposes, hence establishing independence of the
statistical compilation function from other government activities – in particular,
taxation-related activities;

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(e)

integrity, which prohibits other government agencies from unduly influencing the
content of statistical releases;

(f)

confidence, which assures private sector data suppliers that national compilers –
in particular, individual employees – will be penalised for not observing data
confidentiality; and

(g)

aggregation, which ensures the release of information sourced from individual
entities only in aggregated form – that is, strictly no dissemination of individual
entity data to uphold confidentiality. However, the issue of confidentiality usually
arises if there are less than three entities dominating the sector in a country.

Reporting currency

407. The Compilation Guide encourages national compilers to disseminate PSIFIs in
national currencies, where applicable. The Compilation Guide also recommends
transmission of PSIFIs and their underlying data series by national compilers in national
currencies. In short, the domestic currency unit is the recommended currency for
calculating the PIFS by national compilers.

408. The conversion to US dollars, adopted as the numéraire of the PIFD for easier
international comparisons, will be done at the IFSB’s end at the exchange rate prevailing
at the end of each reference period.

Breaks in series

409. In view of their possible impact on the analysis of time-series data, breaks in
series, mostly due to variations in the reporting population, need to be closely monitored
and adequately documented.

410. These variations, whether they involve national data compilers or data suppliers,
or both at the same time, could be due to changes in number or in policy, which may
affect the amount of underlying data series (numerator or denominator) from which
PSIFIs are derived. The entrance or departure of data suppliers from the reporting
population, for instance, could potentially affect the underlying data series and eventually
the calculation of PSIFIs.

Changes in relation to data compilers

411. The addition/withdrawal of data compilers to/from the community of reporting
central banks/monetary authorities may result in an increase/decrease in the amount of
underlying data series for a particular PIFI specified by the Compilation Guide.

412. For instance, if the central bank of Country A decides to discontinue (whether
temporarily or permanently) transmitting its PIFS to the IFSB, the number of reporting
data compilers will decrease. A policy shift undertaken by central banks/monetary
authorities may affect some aspects of the underlying data series compiled.

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II. Changes in relation to data suppliers

413. The entry/exit of data suppliers into/from the community of reporting financial
institutions in a country’s economic territory arising from a merger or acquisition exercise
or the award/revocation of licences may result in an increase/decrease in the amount of
underlying data series compiled by the respective central bank/monetary authority.

414. For instance, the award of new Islamic banking licences will increase the number
of reporting IIFS or data suppliers to a country’s central bank. A policy shift undertaken
by central banks/monetary authorities may affect some aspects of the underlying data
series submitted by financial institutions.

III. Adjustments in the calculation of PSIFIs

415. The documentation of such changes and any impact on the underlying
accounting rules and principles is crucial to preserve the continuity, quality and
consistency of time series. In calculating a PIFI, data compilers are required to take into
account “pre-break” and “post-break” values of underlying data and to carry out
necessary adjustments if one of the causes of changes in the reporting population
occurs.

Table 8.1: Example of adjustments in PIFI calculation

Period 1

Period 2

Period 3

Period 4

No. of IIFS in reporting population

No. of joiners (+), no. of leavers (-)

(+2), (-3)

Financing

income

ratio

0.8 0.7 0.8 0.9

Percentage change

-12.5%

+14.3%

+12.5%

Adjusted percentage change

416. In this example, in period 3, two IIFS join the reporting population of a country
while three leave, resulting in an increase in the financing income ratio despite the
decrease in the number of IIFS in the reporting population.

417. Nonetheless, the 14.3% jump in the financing income ratio does not reflect the
true picture of changes in the underlying performance of reporting IIFS but, rather,
changes in the composition of the reporting population. To determine the real underlying
trend, the percentage change should be adjusted so that the population base in the
current period (Period 3) is the same as that in the comparator period (Period 2).

Resource requirements, PIFS quality and reliability

I. Resource

requirements

418. At any given time, recommendations and requirements in the Compilation Guide
for the purpose of supporting national and international surveillance of financial systems

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will have to balance the needs of PIFS users against the cost to data suppliers and
compilers, as well as against other priorities.

419. The extent of cost implications for both data suppliers and national compilers will
depend on the availability of data, the structure of the IFSI and the time horizon over
which data are developed.

420. Compilation and dissemination of PIFS will bring about cost implications in terms
of information technology (both hardware and software) and human resources (qualified
staff or a relatively high level of technically skilled staff) for national compilers. A cost-
benefit analysis on PSIFIs should help national compilers, given their resource
constraints, to make a decision.

421. Cross-border cooperation among national compilers – that is, home and host
country authorities – could help reduce the cost of compiling data on a foreign-
controlled, cross-border consolidated basis and promote exchanges of knowledge and
skills across jurisdictions.

II. Assessment of statistical quality and reliability

422. Statistical quality control is a multi-dimensional concept that encompasses the
system of collection, processing, compilation and dissemination of statistical information
apart from the accuracy and reliability of output data. The issue of quality is of utmost
importance to both users and producers (suppliers and compilers) of data.

423. The IMF’s Data Quality Assessment Framework (DQAF) provides a
comprehensive but flexible framework for the assessment of data quality. Based on the
United Nations’ “Fundamental Principles of Official Statistics”, the DQAF is a product
following an intensive consultation with national and international statistical authorities
and data users inside and outside the IMF. The DQAF covers all aspects of the
statistical environment or infrastructure in which data are collected, processed and
disseminated.

424. The Manual on Sources and Methods for the Compilation of ESA 95 Financial
Accounts prescribed the following elements for assessing the statistical quality:

a) timeliness, which deals with the publication calendar, reference periods, etc.;
b) accuracy, which deals with the control totals used by sector or instrument

heading; adjustments; controls and corrections; structural views of data when
balancing the system; comparison with other published data;

c) accessibility, which deals with availability or ease of access to data; difference

formats and conditions of data release;

d) clarity, which deals with ensuring that data and methods are documented,

assistance in using the data and understanding the methodology;

e) comparability, which deals with conceptual differences between sets of data

output results over time (sectoral or instrument level) or concordance of results in
a particular reference period;

f) coherence, which deals with the extent to which statistics originating from other

sources are compatible with the published results; and

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g) completeness, which deals with providing the entire range of statistics required

by users.

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APPENDIX 1

Survey on the Use, Compilation and Dissemination of Islamic Financial
Statistics

Background

1.

The Compilation Guide on Prudential Islamic Finance Statistics provides

guidance on the compilation of data and information regarding the Islamic finance
industry at the national level. It sets out the pre-requisite conditions and assumptions for
constructing a reliable, comprehensive and user-oriented global database of Shari’ah
based financial intermediation. The database initiative is intended to facilitate the
compilation and dissemination of internationally comparable measures of financial
structure and financial soundness of the Islamic financial services industry (IFSI). The
focus of the data compilation process will be to fulfil expectations arising from the
prudential measures and international standards. The Database will draw on
internationally comparable data sets, especially of macroprudential indicators, to
enhance transparency and promote analysis. However, the current exercise will focus
primarily on banking and quasi-banking institutions offering Islamic financial services
(IIFS).

2.

In order to adopt best practices and meet the expectations of the industry, the

Islamic Financial Services Board (IFSB) conducted a survey, under the supervision of
the Taskforce on Prudential Islamic Finance Database of central banks/monetary
authorities (IFSB members)

between end-September and end-October 2005. The aim

of the survey was to:
(a) identify a set of core and encouraged indicators at an aggregate level as the building

blocks of the proposed IFSB Prudential Islamic Finance Database (Database), which
will be based on an evolving regulatory and supervisory framework and risk
management practices; and

(b) determine the gap between the indicators which are considered desirable and

feasible by the respondents. The indicators’ desirability is based on their perceived
usefulness, while their feasibility is based on current compilation and dissemination
practices.

The survey covers seven areas. These are: (i) the objectives of the IFSB

Prudential Islamic Finance Database and general information on the macroprudential
analysis practices undertaken by central banks/monetary authorities; (ii) the nature of
reporting institutions (i.e. IIFS that are regulated by participating central banks/monetary
authorities); (iii) general information on data, such as types of Shari’ah compliant
contracts, availability of data, usefulness of data, current status of compilation, and
dissemination practices; (iv) information on the frequency of compilation and the
dissemination of the Islamic banking system; (v) the appropriate methodology,
accounting standards and practices for data compilation within the Islamic banking
system; (vi) valuation practices and other valuation-related issues; and (vii) general
information about the information technology (IT) platform used for uploading and
downloading data.

The respondents include Bank Negara Malaysia, Bank Indonesia, Central Bank of the Islamic Republic of

Iran, Banque du Liban, Central Bank of Kuwait, Saudi Arabia Monetary Agency, Brunei Ministry of Finance,
State Bank of Pakistan, Banko Sentral ng Pilipinas, Monetary Authority of Singapore and Bank of Sudan.

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Summary of the results

Objectives and macroprudential analysis

4.

The soundness and stability of the IFSI is perceived as the ultimate objective of

the database compilation process. The Database is expected to contain indicators
describing operational prudence and structural and financial strength. The database
compilation process could foster cooperation among central banks/monetary authorities
and other relevant agencies; it is also expected to support and help coordinate the
formulation and development of appropriate prudential international standards by the
IFSB. The database compilation process can also be utilised to help promote the
development of the IFSI as an economic vehicle. Technically, the process is expected to
help the enhance transparency, as well as comparability, of the IFSI, through public
accessibility to the Database and published cross-country industry data in IFSB research
reports. In addition, the database compilation process serves as a reliable measure
indicating the market shares of Shari’ah compliant financial transactions, services and
products as a percentage of the whole financial system, at both the national and global
levels, so as to gauge the performance of the IFSI at any given time.

5.

The database compilation process, which is supported by a strong statistical

framework, is used to support macroeconomic analysis. The outcome of
macroprudential analysis is published in public domains in order to gain public
confidence. Most of the publications focus on financial stability reviews, which are
published on either a monthly, quarterly, semi-annual or annual basis. The database
compilation process is aimed at facilitating macroprudential analysis, and at helping to
draw the attention of central banks/monetary authorities to the importance of structural,
institutional and macroeconomic aspects of financial system stability in the Islamic
financial industry. The results of database compilation on IIFS can be presented within
the general regular publication or in a separate chapter on Islamic banking in those
publications. Currently, the use of aggregated prudential data for macroprudential
analysis is limited to only a few countries, and the treatment of IIFS as a peer group is
also fairly limited. Therefore, the proposed compilation of Prudential Islamic Finance
Statistics (PIFS) can provide significant value to the analysis.

Reporting institutions (data suppliers to central banks/monetary authorities)

6.

Currently, the database compilation process is conducted by the central

banks/monetary authorities from full-fledged Islamic banks (including Islamic banking
subsidiaries) and Islamic windows at conventional banks (if any) at the national level for
the purpose of the Database. The compilation process covers full-fledged Islamic bank

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and Islamic windows of conventional banks, as long as they offer Shari’ah compliant
financial services and products. Although priority is given to the Islamic banking and
near-banking industries, the database compilation process would also cover finance
companies, microfinance institutions, saving and loan associations, credit unions,
building society institutions, and other institutions that offer Islamic financial products. In
practice, Islamic financial products are widely available in the Islamic banking industry,
which represents the majority of Islamic financial activities.

Perceived usefulness, current compilation and dissemination practices

The guidelines are expected to provide core and encouraged sets of the

Database, whereby the indicators are designed to accommodate the peculiarities of
Islamic financial products. The Compilation Guide enumerates all the various types of
Shari’ah compliant contracts available across countries, including those specific to a
country, as well as their definitions. However, the most universal ones – that is, those
that are available internationally – are MudÉrabah, MushÉrakah, Murabahah, Bai’
Bithaman Ajil, Al IjÉrah, Qard, IstisnÉ, Wadiah, Wakalah, Salam and Bai’ Al-Inah.

In principle, core indicators are referred to as meaningful, essential and crucial

measures for monitoring financial soundness and stability which represent the analytical
relevance, perceived usefulness and availability of indicators based on current
compilation practices. Some indicators, such as profit equalisation reserve (PER) and
investment risk reserve (IRR), are also included in the core set after considering their
usefulness, as mentioned in the IFSB’s Exposure Drafts on Capital Adequacy, Risk
Management and Corporate Governance. Encouraged indicators may be important in
some countries but of less significance in others – that is, they may fulfil some criteria of
financial soundness assessment but not all.

The rationale for working with two sets of data is to avoid a one-size-fits-all

approach and to provide a certain degree of flexibility in selecting indicators for
assessment of the strength (and vulnerabilities) of the financial system. Indeed, each
country will have the latitude to combine core indicators with some selected encouraged

__________________________

Some peculiarities of Islamic financial products:

In terms of exceptions:

Countries

Types of Shari’ah compliant contracts offered (as per the Survey’s specified list)

1. Brunei

All except Salam

2. Indonesia

All except Bai’ Bithaman Ajil and Bai’ al-Inah

3. Malaysia

All

4. Philippines

Only Bai’ Bithaman Ajil, Musyārakah, Mudārabah and Ijarah

5. Singapore

Only Wadī’ah

6. Pakistan

All except Bai’ al-Inah and Wadī’ah

7. Iran

All except Bai’ Bithaman Ajil, Bai’ al-Inah, Ijarah, Wadī’ah and Wakālah

8. Kuwait

All except Salam

9. Lebanon

All except Bai’ al-Inah

10. Saudi Arabia

All

11. Sudan

All except Al Ijarah Thumma al-Bai’/Al Ijarah Muntahia Bittamleek, Bai’ al-Inah, Ijarah,
Wadī’ah and Wakālah

In terms of unique products offered:

Countries

Other types of Shari’ah compliant contracts offered, specific to a country (not

specified by the Survey)

1. Brunei

Rah’nu

2. Malaysia

Bai'Dayn, Kafalah, Sarf, Hiwalah and Rah'nu

3. Pakistan

Diminishing Musyārakah

4. Saudi Arabia

Tawarruq

5. Iran

Mugawala

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indicators, depending on its level of financial development, institutional structure and
context in the region. To facilitate monitoring of the soundness and stability of the IFSI
(as per one of the agreed objectives of the Database), both at the national and global
levels, the core data should ideally be comparable across countries, which should be a
medium-term goal. For this purpose, it is recommended that the Compilation Guide
provide definitions of all agreed core and encouraged indicators based on internationally
accepted accounting principles, harmonised aggregation and consolidation practices.
This definitional guideline is in line with the thrust towards international comparability and
convergence in best practices.

10.

In practice, most countries have been compiling the core indicators for their own

purposes so that it will not be too burdensome for national compilers – that is, central
banks/monetary authorities – to submit data to the IFSB for the purpose of compiling the
Database. Greater effort should be allocated to the encouraged indicators due to their
relatively lower data availability.

11.

Dissemination practices vary across countries. Although it is common for most

countries not to disseminate all compiled data, the divergence in the amount of compiled
and disseminated data for most countries can be explained by the fact that the private
sector has access to a narrower range of PIFS compared to national authorities.
However, current practices indicate that the number of publicly available prudential
indicators is increasing.

Periodicity

12.

The data is most commonly compiled either monthly or quarterly. This data,

which is compiled for supervisory purposes, relates to the assessment of capital
adequacy, asset quality, liquidity, and sensitivity to market risk. Data compiled on a
semi-annual or annual basis relates to the assessment of management quality, earnings
and institutional-related information. Most of the data compiled is not publicly
disseminated, due to its sensitivity and potential impact on public confidence in the
banking system. Where data is disseminated, the process occurs mainly on a monthly,
quarterly or annual basis. The number of working days after the reference period for
data dissemination as practised by the survey respondents varies considerably, ranging
between 15 and 120 days. Taking into consideration the practices of reporting
institutions vis-à-vis the majority of central banks/monetary authorities worldwide, a
quarterly frequency for national compilation of most data should be feasible while
allowing a lag period of one month from the reference period for data transmission by
central banks/monetary authorities to the IFSB.

Methodology and accounting standards and practices

13.

All respondents adhere to a national residency consolidation basis, while some

countries consolidate cross-border IIFS operations on a global basis. There is also a
practice in one particular country of domestic conventional banks offering Islamic
financial services reporting on a global consolidation basis, but not foreign conventional
banks offering Islamic financial services.

While national consolidation focuses on IIFS

___________________________

National residency basis consists of consolidation of positions and flows of resident IIFS i.e. of domestic IIFS

(headquarters and local branches/subsidiaries and of branches/ subsidiaries of foreign IIFS, located and operating in the

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operations within national boundaries (hence the main policy focus of national
authorities), global consolidation will capture information on risks and financial exposures
on a worldwide basis.

14.

The respondents tend to agree that the consolidation method applied in the

Compilation Guide follows the IMF’s Compilation guide on FSIs. The respondents
recommended that the Compilation Guide adopt the domestically controlled, cross-
border consolidated method (DCBS) for domestically controlled and incorporated IIFS,
which is the method recommended by the International Monetary Fund (IMF) -initiated
financial services industries. In addition, central banks may use a combination of the
domestically consolidated method for resident IIFS, the foreign-controlled, cross-border
consolidated method for domestically incorporated subsidiaries/branches of foreign IIFS,
and the cross-border consolidated method for domestically controlled and incorporated
IIFS and domestically incorporated subsidiaries/branches of foreign-controlled IIFS, if
they are considered analytically useful.

15.

All the respondents apply the International Accounting Standards Board’s

International Financial Reporting Standards (IFRS), while some also adhere to their
national accounting standards. The Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) standards are considerably applicable in some countries,
along with the national accounting standards dedicatedly designed to accommodate
Islamic banking operations.

16.

The diversity in national practices could render PIFS less comparable and

inconsistent across countries, due to:

(a) differences in national definitions of indicators;
(b) differences in consolidation practices – that is, different consolidation bases for

the same data;

tradable financial instruments; and

(d) differences in revaluation practices for foreign currency positions, especially the

tendency to use official exchange rates among developing countries although the
market exchange rate is more transparent and better reflects the value.

Despite this diversity in national practices, the survey brought to light that respondents
more or less share a common ground, since all of them are in compliance with the IFRS.
Eventually, the Compilation Guide will have to specify an accounting framework and
principles for the purpose of compiling PIFS.

Valuation practice and other valuation-related issues

17.

With respect to the general reference value, each respondent specifies his own

value assessment. Method applied to the instruments/transactions.

There are three

value assessments used by the authorities – that is, historical price, market price and
nominal value approaches – which are applied differently. Some countries apply one
specified approach, while others apply a combination of two or three approaches for
each Islamic financial instrument. Although methods for value assessment of
instruments/transactions seem to vary across countries, similar patterns can be seen in
the following instruments:

(a)

Fixed assets and Murabahah transactions are valued at historic price.

______________________________________________________________________

reporting country. Global consolidation basis consists of consolidation of positions and flows of resident IIFS
(consolidation based on national residency basis) and of overseas subsidiaries/branches of domestic IIFS.

129

(b)

Tradable and investment securities are valued at market price or fair value.

Market price is the most commonly used method. In most jurisdictions, revaluations are
carried out on the balance sheet close of business date.

18.

Two methods are applied to determine the foreign exchange conversion – that is,

the market exchange rate and the official exchange rate. However, in some markets, the
official exchange rates are in fact the market exchange rates. Each country revalues its
foreign currency-denominated instruments/transactions or foreign currency positions
differently. In some countries, foreign currency-denominated positions and securities
under trading books are revalued on a daily basis and those under banking books are
revalued on a monthly basis, while in other countries revaluations are conducted at
month-end. Some countries emphasise the importance of liquidity positions, so that
revaluation processes are conducted monthly and weekly. The revaluation process is
conducted to assess the liquidity positions and forex positions, while others use daily
closing rates. Revaluation on the balance sheet closing date for foreign currency-
denominated positions is the most common practice.

IT platform for handling data (uploading and/or downloading processes)

19.

In most jurisdictions, IIFS transmit data to their respective central

banks/monetary authorities via MS Excel; the exceptions are those that use XML or a
combination of the two platforms. Most of the authorities subsequently transmit particular
required data to supranational bodies/international organisations such as the IMF, the
World Bank and the Bank for International Settlements via MS Excel; although some
countries prefer to transmit data via GESMES, XML, or a combination of two or more of
the specified platforms. Based on the platform currently used by most respondents for
data submission to supranational bodies/international organisations, usage of the user-
friendly MS Excel as an IT platform for transmitting data to the IFSB would be more
appropriate in the initial stage. However, more efficient database management may be
achieved by using more sophisticated platforms such as GESMES, OLAP or XML.

20.

The data communication mode used varies across countries. The HTTP/HTTPS

mode seems to be the most widely employed among respondents; while other countries
employ the FTP/SFTP and SMTP modes, HTTP/HTTPS and SMTP modes, the
FTP/SFTP mode, and the HTTP/HTTPS and SSL modes.

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APPENDIX 2

SUMMARY OF GUIDANCE

A. Summary of guidance for core PSIFIs

1(a). Capital adequacy ratio (Standard formula)
Definition
This PIFI intends to measure the capital adequacy of IIFS based on the Standard
formula as defined in the IFSB’s CAS. The numerator is the sector-wide regulatory
capital (Item 6.8.5(a)), and the denominator is represented by sector-wide risk-
weighted assets for credit (Item 6.8.5(b)) and market (Item 6.8.5(c)) risks, plus capital
charge for operational risks (Item 6.8.5(j)), minus risk-weighted assets funded by PSIA
for credit (Items 6.8.5(c) and 6.8.5(d)) and market (Items 6.8.5(e) and 6.8.5(g)) risks.
One hundred per cent of credit and market risk-weighted assets funded by both
restricted and unrestricted PSIA shall be borne by restricted IAH and unrestricted IAH,
while all operational risk arising from the management of these assets shall be borne
by IIFS.
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated
regulatory capital, consolidated risk-weighted assets for credit and market risks,
consolidated operational risks and consolidated risk-weighted assets funded by PSIA
for credit and market risks of domestically controlled IIFS groups in the reporting
population should be available to supervisory authorities.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group consolidated denominator are aggregated at the sector level.

1(b). Capital adequacy ratio (Supervisory discretion formula)
Definition
This PIFI intends to measure the capital adequacy of IIFS based on the Supervisory
discretion formula as defined in the IFSB’s CAS. The numerator is the sector-wide
regulatory capital (Item 6.8.5(a)), and the denominator is the sector-wide adjusted risk-
weighted assets. The adjusted risk-weighted assets are represented by the risk-
weighted assets for credit (Items 6.8.5(b)) and market (Item 6.8.5(c)) risks, plus capital
charge for operational risks (Item 6.8.5(j)), minus risk-weighted assets funded by
restricted PSIA for credit (Item 6.8.5(c)) and market (Item 6.8.5(e)) risks, minus (1-α)
risk-weighted assets funded by unrestricted PSIA for credit (Item 6.8.5((d)) and market
(Item 6.8.5(g))

risks, minus (α) risk-weighted assets funded by PER and IRR of

unrestricted IAH for credit (Item 6.8.5(k)) and market (Item 6.8.5(l)) risks. A portion of
credit and market risk-weighted assets funded by PSIA is deemed to be borne by IIFS
due to the displaced commercial risk whereby α shall be determined by national
supervisory authorities. All operational risk arising from the management of these
assets shall be borne by IIFS.
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated
regulatory capital and the consolidated adjusted risk-weighted assets of domestically

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controlled IIFS groups in the reporting population should be available to supervisory
authorities.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group consolidated denominator are aggregated at the sector level.

2. Ratio of regulatory Tier 1 capital to total risk-weighted assets
Definition
This PIFI intends to measure the capital adequacy of IIFS based on the core capital
concept as defined by the supervisor, based on the concept developed by IFSB. The
numerator is the sector-wide Tier 1 capital (Item 6.8.1), while the denominator is the
sector-wide total risk-weighted assets (Item 6.8.6).
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated Tier 1
capital and the consolidated total risk-weighted assets of each domestically controlled
IIFS group in the reporting population should be available to supervisory authorities.
The availability of underlying data reported to supervisory authorities will determine the
scope of data dissemination.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group consolidated denominator are aggregated at the sector level.

3. Ratio of credit risk-weighted assets to total risk-weighted assets
Definition
This PIFI intends to measure the portion of credit risk-weighted assets of an IIFS out of
its total risk-weighted assets as defined in the IFSB’s CAS. The numerator is the
sector-wide credit risk-weighted assets (Item 6.8.5(b)), while the denominator is the
sector-wide total risk-weighted assets (Item 6.8.6).
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated credit
risk-weighted assets and the consolidated total risk-weighted assets of each
domestically controlled IIFS group in the reporting population should be available to
supervisory authorities.
Types of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group denominator are aggregated at the sector level.

4. Gross non-performing financing (NPF) ratio
Definition
This PIFI intends to identify problems with, and to gauge the level of, asset quality in
the financing portfolio of IIFS. The numerator is the value of gross NPF (Item 6.8.15),
while the denominator is the total value of outstanding SharÊ’ah compliant financing

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(including NPF and before deduction of specific provisions) (Item 6.6.9).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on NPF or financing. The
national definition of NPF may vary across countries, while the definition of banking and
near-banking IIFS as specified in the Compilation Guide may need to be compared to
the definition of “other depositary corporations” in the monetary and financial statistics
or to the definition used for supervisory purposes.
Type of aggregation or consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory-based data may need to be
aggregated to obtain the numerator and denominator of this PIFI.

5. Ratio of net NPF to capital
Definition
This PIFI intends to gauge the potential impact of NPF, net of specific provisions (SP)
or specific allowance for bad and doubtful financing, on capital, although the impact of
losses due to NPF on capital is uncertain in most circumstances since an IIFS may
expect to recover some of the potential NPF losses. The numerator is the value of
gross NPF minus the value of SP (adjusted for provisions on intra-sectoral financing, if
any) (Item 6.8.18), while the denominator is the value of “capital and reserves” or
owner’s equity (Item 6.6.20).

SP corresponds to the outstanding amount of provisions

or charges made against the value of specific financing (including a collectively
assessed group of financing) and reflects identifiable losses. Total capital and reserves
in the sectoral balance sheet represent the amount available to absorb unidentified
losses. Total regulatory capital may also be considered as the denominator for the
cross-border consolidated method.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics. Since national accounts do not provide information on NPF and SP, or all the
components of capital and reserves or regulatory capital, additional data would need to
be compiled to make use of national accounts. In measuring sector-wide capital, intra-
sector equity investments are deducted from the overall capital in the sector so that
capital and reserves held within the sector are not double counted. The definition of
capital and reserves as specified by these sources of underlying data may need to be
examined to ensure compatibility with that in the Compilation Guide, while the definition
of NPF may vary across countries. NPFs on financing among IIFS within the same
group in the reporting population are excluded. In the balance sheet, equity
investments in subsidiaries and associates (and reverse investments) should be valued
at the proportionate share of the capital and reserves with an impact on total capital
and reserves measured on a national accounts basis. The Compilation Guide relies on
national practices to identify SP, but recommends clear documentation of such
practices.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
to obtain the numerator and denominator of this PIFI.

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6(a). PER and ratio of IRR to PSIA for restricted IAH
Definition
This PIFI intends to gauge the size of prudential reserves set aside in the form of PER
and IRR for restricted IAH, to respectively smooth their returns and to absorb potential
losses on investments financed by PSIA funds, in comparison with total PSIA funds
allocated to restricted IAH. The numerator is the outstanding value of PER and IRR
funds allocated to restricted IAH (Items 6.7.19 and 6.7.20), while the denominator is
the outstanding value of restricted PSIA funds (Item 6.7.10).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on PER, IRR or PSIA.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
to obtain the numerator and denominator of this PIFI.

6(b). PER and ratio of IRR to PSIA for unrestricted IAH
Definition
This PIFI intends to gauge the size of prudential reserves set aside in the form of PER
and IRR for unrestricted IAH, to respectively smooth their returns and to absorb
potential losses on investments financed by PSIA funds, in comparison with total PSIA
funds allocated to unrestricted IAH. The numerator is the outstanding value of PER and
IRR funds allocated to unrestricted IAH (Items 6.9.19(b) and 6.9.19(c)), while the
denominator is the outstanding value of unrestricted PSIA funds (Item 6.6.19(a)).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on PER, IRR or PSIA.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
to obtain the numerator and denominator of this PIFI.

7. Financing income ratio
Definition
This PIFI, approximately equivalent to the FSI of “interest margin to gross income”,
intends to measure the contribution of SharÊ’ah compliant financing activities to gross
income of an IIFS. The numerator is the value of net income generated from SharÊ’ah
compliant financing activities using funds from shareholders, IAH, and savings and
current account holders (equivalent to “interest income”) (Items 6.5.1), minus the value
of income attributable to IAH and savings and current account holders (equivalent to
“interest expense”) (Item 6.5.5), while the denominator is the value of total gross
income (Item 6.5.6), which includes income from SharÊ’ah compliant financing activities
and all other non-financing-related income. Among other gross income items, the
Compilation Guide encourages inclusion of realised and unrealised gains and losses on
all financial instruments (financial assets and liabilities, in domestic and foreign
currencies) valued at market or fair value in the balance sheet, excluding equity in
associates, subsidiaries and any reverse equity investments. Gains and losses on the
sale of an associate or subsidiary are excluded from gross income.

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Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on financing income or
total income of IIFS. The extent of available underlying data will depend upon national
commercial accounting practices.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
to obtain the numerator and denominator of this PIFI. At the sector level, a number of
adjustments are needed to eliminate the impact of intra-sector transactions on sectoral
total income.

8. Fee-based income ratio
Definition
This PIFI intends to measure the contribution of SharÊ’ah compliant fee-generating
activities to gross income of an IIFS. The numerator is the value of income engendered
from Shari’ah compliant fee-generating activities using funds from shareholders, IAH,
and savings and current account holders (Item 6.5.1(f)), while the denominator is the
value of total gross income (Item 6.5.6), which includes income from SharÊ’ah
compliant financing activities and all other non-financing-related income. Please refer to
issues discussed in the financing income ratio for more detail.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on fee-based income or
total gross income of IIFS.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
to obtain the numerator and denominator of this PIFI.

9. Ratio of cost to income
Definition
This PIFI intends to measure the size of non-financing-related expenses (such as
personnel and administrative expenses) to gross income. The numerator is the value of
operating expenses, which may include personnel, administrative costs and all other
non-financing overhead expenses (Items 6.5.2 and 6.5.2(b)), while the denominator is
the value of gross income (Item 6.5.6), which includes income from SharÊ’ah compliant
financing activities and all other non-financing-related income. Please refer to issues
discussed in the financing income ratio for more detail.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah non-compliant
income or total gross income of IIFS. To obtain the sector-wide total, all non-financing-
related expenses paid to other IIFS are excluded.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated

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with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

10. Return on assets (ROA)
Definition
This PIFI intends to measure the efficiency of asset utilisation by IIFS. The numerator is
the value of net income (before extraordinary items, zakah and taxes) (Item 6.5.7),
while the denominator is the average value of total assets (financial and non-financial)
(Item 6.6.1)

over the same period. At minimum, the denominator can be calculated by

taking the average of positions between beginning and end of the period. However, use
of the most frequent observations available is encouraged for calculating the average.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics. The availability of net income data to supervisory authorities, and the extent
of compatibility with the definition as specified in the Compilation Guide, may depend
upon national accounting practices. Since it includes gains and losses on financial
instruments (financial assets and liabilities, in domestic and foreign currencies) valued
at market or fair value in the balance sheet, excluding equity in associates, subsidiaries
and any reverse equity investments, as well as gains and losses from the sales of fixed
assets – that is, the difference between the sale value and the balance sheet value at
the previous end-period – net income is calculated on a basis closer to commercial
accounting and supervisory approaches than to national accounting. Goodwill is not
classified as an asset; hence, it is not amortised in the income account and deducted
from capital and reserves. Gains and losses on the sale of an associate or subsidiary
(or disinvestment of a reverse investment) are also excluded from income.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI. At the sector level, some adjustments – including the elimination of income items
arising from claims on IIFS in the reporting population, such as the investing IIFS’
prorated share of earnings of associate IIFS, dividends receivable from other IIFS, and
provisions for accrued income on NPF and SP on claims on other IIFS – are required to
eliminate the impact of intra-sector transactions on sectoral net income.

11. Return on equity (ROE)
Definition
This PIFI intends to measure the efficiency of capital utilisation by IIFS. The numerator is
the value of net income (before extraordinary items, zakah and taxes) (Item 6.5.7), while
the denominator is the average value of capital and reserves or owner’s

equity (Item

6.6.20)

over the same period. At minimum, the denominator can be calculated by taking

the average of positions between the beginning and end of the period. However, use of
the most frequent observations available is encouraged for calculating the average.
Sources of data and issues for national compilers
Please refer to issues discussed under the summary of “return on assets” for more detail
on net income, and to the summary of “ratio of net NPF to capital” for capital.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be considered

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for macroeconomic linkages. Supervisory data may need to be aggregated with some
sector-wide adjustments to obtain the numerator and denominator of this PIFI.

12(a). Average actual rate of return or profit rate to restricted PSIA by maturity
Definition
This PIFI intends to arrive at a national average for the rate of return or profit rate
effectively enjoyed by restricted IAH in the financial system, by maturity – in particular,
the 1-month, 3-month, 6-month, 9-month, 12-month, 18-month, 24-month, 36-month-
and-beyond maturities. The actual or realised rate of return for various categories of
restricted PSIA declared by IIFS refers to the effective profit rate that restricted IAH
receive on their invested funds with IIFS. This could provide an indication of funds
mobilised, agreed profit-sharing ratios and the amount of profits distributed to
respective categories of restricted IAH. In practice, it is not uncommon to observe a
higher actual rate of return for restricted IAH compared to that for unrestricted IAH for
similar maturities.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on rate of return to
restricted PSIA.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

12(b). Average actual rate of return or profit rate to unrestricted PSIA by maturity
Definition
This PIFI intends to arrive at a national average for the rate of return or profit rate
effectively enjoyed by unrestricted IAH in the financial system, by maturity – in
particular, the 1-month, 3-month, 6-month, 9-month, 12-month, 18-month, 24-month,
36-month-and-beyond maturities (Item 6.6.19(a)). The actual or realised rate of return
for various classes of unrestricted PSIA declared by IIFS refers to the effective profit
rate that unrestricted IAH receive on their invested funds with IIFS. This could provide
an indication of funds mobilised, agreed profit-sharing ratios and the amount of profits
distributed to respective classes of unrestricted IAH.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on rate of return to
unrestricted PSIA.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

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13. Liquid asset ratio
Definition
This PIFI intends to provide an indication of the liquidity available to meet expected and
unexpected demands for cash. The numerator is the value of broad liquid assets (Item
6.8.12(a))

, while the denominator is represented by the average value of total assets

(financial and non-financial) (Item 6.6.1) over the same period. In the numerator,
distinguishing between domestic and foreign currency-denominated liquid assets could
prove useful, particularly for monitoring purposes in periods of financial stress. Private
sector securities assigned with less than investment grade should be excluded from
liquid assets. At minimum, the denominator can be calculated by taking the average of
positions between the beginning and end of the period. However, use of the most
frequent observations available is encouraged for calculating the average.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on liquid assets and total
Shari’ah compliant assets. Some approximation of the core measure of liquid assets
may be available in the SNA 1993’s full sequence of accounts. Please refer to issues
discussed under the summary of “return on assets” for more detail.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI. To calculate sector-wide liquid assets, non-traded claims of an IIFS on other IIFS
within the reporting population may need to be eliminated before aggregation.

14. Ratio of liquid assets to short-term liabilities
Definition
This PIFI intends to capture the liquidity mismatch of assets and liabilities and provides
an indication of the extent to which IIFS could meet short-term withdrawals of funds
without facing liquidity problems. The numerator is the value of core liquid assets (Item
6.8.12(b))

, while the denominator is represented by short-term liabilities (Item 6.4.13).

The broad measure of liquid assets (as defined in the summary of “liquid asset ratio”)
can also be considered as an alternative for calculating the numerator.
Sources of data and issues for national compilers
In general, data on short-term liabilities on a remaining maturity basis are available
from supervisory sources, although the extent to which the national definition is
compatible with the concepts specified in the Compilation Guide requires further
consideration. National accounts-based sources generally do not provide data on short-
term liabilities, especially on a remaining maturity basis, although they could be
available on an original maturity basis. Data on financial derivative positions are
available in national accounts-based sources but not on a short-term basis. Please
refer to issues discussed under the summary of “liquid asset ratio” for more detail.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

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15. Ratio of foreign exchange net open positions to capital
Definition
This PIFI intends to identify the exchange rate risk exposure of IIFS backed by their
capital. It measures the mismatch (open position) of foreign currency and liability
positions to assess the potential vulnerability of IIFS’ capital position to exchange rate
movements. The numerator is the value of all foreign currency positions (Item 6.8.22)
in a single unit of account whereby the conversion is done using the market spot
exchange rate as of the reporting date, while the denominator is capital and reserves or
owner’s equity (Item 6.6.20). Please refer to issues discussed under the summary of
“ratio of net NPF to capital” for more detail, especially on capital.
Sources of data and issues for national compilers
Given supervisory authorities’ interest in IIFS’ exposure to foreign currency, data on
forex net open positions, which national accounts-based sources do not provide, are
most likely to be available from supervisory sources. The extent to which the national
definition is compatible with the concepts specified in the Compilation Guide requires
further consideration.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

16. Ratio of commodity net open positions to capital
Definition
This PIFI intends to identify the commodity risk exposure of IIFS compared to their
capital. The numerator is the value of all positions in commodities (Item 6.8.23), mostly
for Salam and Bay Muajjal contracts, while the denominator is capital and reserves of
owner’s equity (Item 6.6.20). Please refer to issues discussed under the summary of
“ratio of net NPF to capital” for more detail, especially on capital.
Sources of data and issues for national compilers
Data on commodity net open positions, which national accounts-based sources do not
provide, are most likely to be available from supervisory sources. The extent to which
the national definition is compatible with the concepts specified in the Compilation
Guide requires further consideration.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

17. Percentage of financing (by type of Shar

Ê’ah compliant contracts) to total

Shari’ah compliant financing

Definition
This SIFI intends to identify the financing concentration in type of SharÊ’ah compliant
contract. The numerator is the outstanding value of financing extended for each type of
Shari’ah compliant contract (Item 6.8.14(a)), while the denominator is the total value of
outstanding Shari’ah compliant financing (including NPF and before deduction of SP)
(Item 6.8.14)

, multiplied by 100.

139

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah compliant
financing by type or in total.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

18. Ratio of total Shar

Ê’ah compliant financing to overall financing

Definition
This SIFI intends to gauge the market share of SharÊ’ah compliant financing in a
financial system. The numerator is the total value of outstanding SharÊ’ah compliant
financing (including NPF and before deduction of SP) (Item 6.8.14), while the
denominator is represented by the value of the overall outstanding financing, Islamic
and conventional (if any) extended by the financial system.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah compliant
financing by type or in total.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

19. Sectoral distribution (by economic activities) of Shar

Ê’ah compliant financing

to total Shar

Ê’ah compliant financing

Definition
This SIFI intends to provide information on the spread of financing (including NPF and
before deduction of SP) among sectors by economic activities as specified in the ISIC,
Revision 4 (December 2005) for sectoral analysis – in particular, to identify possible
financing concentration in certain sectors. The numerator is the value of outstanding
SharÊ’ah compliant financing (including NPF and before deduction of SP) extended to
each sector by economic activities (Item 6.8.14(b)), while the denominator is the total
value of outstanding SharÊ’ah compliant financing (including NPF and before deduction
of SP) (Item 6.8.14).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah compliant
financing by type or in total. Since all sectors are covered, the sum of all sectoral ratios
should be in unity. However, the availability of financing data by sector may vary across
countries, depending on the supervisory practices.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated

140

with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

20. Ratio of total Shar

Ê’ah compliant funding to overall funding and liabilities

Definition
This SIFI intends to gauge the market share or the size of SharÊ’ah compliant funds-
and-deposit-taking in a financial system. The numerator is the total value of SharÊ’ah
compliant funding (amount of funds from restricted and unrestricted PSIA, as well as
SharÊ’ah compliant savings and current accounts) (Items 6.7.18, 6.6.19(a), 6.6.13 and
6.2.12)

, while the denominator is represented by the value of the overall funding and

liabilities, Islamic and conventional (if any), that exist in a financial system.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah compliant
funding by type or in total.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

21. Ratio of PSIA to total Shar

Ê’ah compliant funding

Definition
This SIFI intends to gauge the market share or the size of PSIA out of total SharÊ’ah
compliant funds-and-deposit-taking in a financial system. The numerator is the
outstanding value of total restricted and unrestricted PSIA funds (Items 6.7.18 and
6.6.19(a))

, while the denominator is represented by the total value of SharÊ’ah

compliant funding (amount of funds from restricted and unrestricted PSIA as well as
SharÊ’ah compliant savings and current accounts) (Items 6.7.18, 6.6.19(a), 6.6.13 and
6.2.12)

that exist in a financial system.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on SharÊ’ah compliant
funding by type or in total.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Supervisory data may need to be aggregated
with some sector-wide adjustments to obtain the numerator and denominator of this
PIFI.

22. Number of total banking and near-banking IIFS in a financial system
Definition
This SIFI intends to gauge the depth and degree of competition of Islamic banking in a
financial system through the number of market players in existence.
Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national accounts
do not provide information on the number of IIFS in a country.
Type of aggregation and consolidation applicable

141

Not applicable.

23. Number of resident branches per hundred thousand inhabitants of the home

country

Definition
This SIFI intends to provide information on the spread and reach of banking and near-
banking IIFS in a financial system, or the level of the population’s financial access
through all resident branches of either domestically incorporated parent IIFS and/or
foreign-controlled parent IIFS, located and operating in a country. This SIFI represents
the number of total resident branches (of domestically incorporated and/or foreign-
controlled IIFS) for every 100,000 inhabitants of the domestic population.
Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national accounts
do not provide information on the number of IIFS in a country.
Type of aggregation and consolidation applicable
Not applicable.

24. Number of resident foreign-owned branches and/or banking subsidiaries per

hundred thousand inhabitants of the home country

Definition
This SIFI intends to gauge foreign presence and the importance of foreign IIFS in a
financial system through the number of branches and/or banking subsidiaries of
foreign-controlled parent IIFS, located and operating in a country. This SIFI represents
the number of total resident foreign-owned branches and/or banking subsidiaries (of
foreign-controlled IIFS) for every 100,000 inhabitants of the domestic population.
Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national accounts
do not provide information on the number of IIFS in a country.
Type of aggregation and consolidation applicable
Not applicable.

25. Number of overseas branches and/or banking subsidiaries (if any) per

hundred thousand inhabitants of the host country

Definition
This SIFI intends to gauge the degree of international operations of domestically
incorporated parent IIFS through the number of their branches and/or banking
subsidiaries, located and operating abroad. This SIFI represents the number of total
overseas branches and/or banking subsidiaries, located and operating abroad (of
domestically incorporated IIFS) for every 100,000 inhabitants of the host country.
Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national accounts
do not provide information on the number of IIFS in a country.
Type of aggregation and consolidation applicable
Not applicable.

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B. Summary of guidance for encouraged PSIFIs

1. Ratio of market risk-weighted assets to total risk-weighted assets
Definition
This PIFI intends to measure the portion of market risk-weighted assets of banking and
near-banking IIFS out of their total risk-weighted assets as defined in the IFSB’s CAS.
The numerator is the sector-wide market risk-weighted assets (Item 6.8.5(e)), which
represent the result of multiplying the amount of capital charge or capital requirement
for market risk (Item 6.8.5(h)) by a conversion factor (usually 12.5), while the
denominator is the sector-wide total risk-weighted assets (Item 6.8.6).
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated market
risk-weighted assets and the consolidated total risk-weighted assets of each
domestically controlled IIFS group in the reporting population should be available to
supervisory authorities.
Types of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group denominator are aggregated at the sector level.

2. Ratio of operational risk-weighted assets to total risk-weighted assets
Definition
This PIFI intends to measure the portion of market risk-weighted assets of banking and
near-banking IIFS out of their total risk-weighted assets as defined in the IFSB’s CAS.
The numerator is the sector-wide operational risk-weighted assets (Item 6.8.5(i)), which
represent the result of multiplying the amount of capital charge or capital requirement
for operational risk (Item 6.8.5(j)) by a conversion factor (usually 12.5), while the
denominator is the sector-wide total risk-weighted assets (Item 6.8.6).
Sources of data and issues for national compilers
Underlying data are compiled from supervisory series whereby the consolidated
operational risk-weighted assets and the consolidated total risk-weighted assets of
each domestically controlled IIFS group in the reporting population should be available
to the supervisory authorities.
Types of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group denominator are aggregated at the sector level.

3. Ratio of SP to total financing for each type of Shar

Ê’ah compliant contract

Definition
This PIFI intends to measure the portion of SP out of total SharÊ’ah compliant financing
by type of underlying contract. The numerator is the total value of outstanding SP (Item
6.8.17(a))

for each type of SharÊ’ah compliant contract, while the denominator is the

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total value of outstanding SharÊ’ah compliant financing (including NPF and before
deduction of SP) (Item 6.8.14).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on financing income or
total income of IIFS. The extent of available underlying data will depend upon national
commercial accounting practices.
Types of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group denominator are aggregated at the sector level.

4. Percentage of gross NPF by type of Shar

Ê’ah compliant contract

Definition
This PIFI intends to measure the portion of gross NPF out of total SharÊ’ah compliant
financing by the type of underlying contract. The numerator is the total value of
outstanding SP (Item 6.5.2) for each type of SharÊ’ah compliant contract, while the
denominator is the total value of outstanding SharÊ’ah compliant financing (including
NPF and before deduction of SP) (Item 6.8.14).
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and financial
statistics, while national accounts do not provide information on financing income or
total income of IIFS. The extent of available underlying data will depend upon national
commercial accounting practices.
Types of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and
the group denominator are aggregated at the sector level.

5. Percentage of gross NPF by type of economic activity

Definition
This PIFI intends to measure the portion of NPF out of total SharÊ’ah compliant
financing by type of economic activity. The numerators are the total value of the NPF

for each type of SharÊ’ah compliant contract, while the denominator is the total value of
the NPF (Item 6.8.15).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for financial
soundness analysis. In addition, the domestically consolidated method can be
considered for macroeconomic linkages. Both the group consolidated numerator and

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the group denominator are aggregated at the sector level.

6. Coverage ratio to NPF

Definition
This PIFI intends to measure the portion amount of general provisions or general
allowance for bad and doubtful financing (Item 6.5.2) out of their total amount NPF
(Item 6.8.15)

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Both the group consolidated numerator
and the group denominator are aggregated at the sector level.

7. Investment income ratio

Definition
This PIFI intends to measure the portion amount of income from non-financing
activities (Items 6.5.1(e) and 6.5.1(f)) out of their total gross income (Item 6.5.6).
The income from non-financing investment activities includes income arising from
securities such as sukËk, shares and other financial assets held for trading or
investment purposes.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Both the group consolidated numerator
and the group denominator are aggregated at the sector level.

8. Ratio of Shar

Ê’ah non-compliant income (if any)

Definition
This PIFI intends to gauge the extent of SharÊ’ah non-compliant activities and/or
income arising from SharÊ’ah non-compliant sources of funds, if any, to gross income

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of an IIFS. The numerator is the value of income generated from SharÊ’ah non-
compliant activities, or arising from SharÊ’ah non-compliant sources of funds (Item
6.8.11)

, while the denominator is the value of total gross income (Item 6.5.6), which

includes income from SharÊ’ah compliant financing activities and all other non-
financing-related income. SharÊ’ah compliance risk is a type of operational risk that
could lead to non-recognition of income and resultant losses. To better reflect the
SharÊ’ah compliance risk of a particular IIFS, supervisory authorities have the
discretion to impose a risk-weight higher than 15% as they deem fit. Please refer to
issues discussed under the summary of “financing income ratio” for more detail.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on SharÊ’ah
non-compliant income or total gross income of IIFS.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to obtain the numerator and denominator of this PIFI.

9. Return on financing
Definition
This PIFI intends to gauge the average return (in percentage terms) for each type of
SharÊ’ah compliant financing contract.
Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on return on
financing by type of SharÊ’ah compliant contract.
Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

10. Income distributed to IAH out of total gross income

Definition
This PIFI intends to measure the amount of profit distributed to the IAH (Items
6.7.15 and 6.5.5)

out of total amount of gross income of IIFS (Item 6.5.6).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

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11. Total off-balance sheet items included in total assets

Definition
This PIFI intends to measure the amount of total off-balance sheet items (Item
6.6.21)

included in total assets. The numerator is the total amount of off-balance

sheet items, which may include total liabilities, equity of unrestricted IAH, and
capital and reserves (Items 6.6.18, 6.6.19 and 6.6.20), while the denominator is the
total of assets (Item 6.6.1).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

12(a). Spread between reference rates and rates of return on restricted IAH

Definition
This PIFI intends to compare the return on the reference rate recognised by the
market with the return given by the restricted IAH. It provides information on the
spread and the reach of banking and near-banking IIFS in a financial system, or on
the level of the population’s financial access through all resident branches of either
domestically incorporated parent IIFS and/or foreign-controlled parent IIFS, located
and operating in a country.

Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national
accounts do not provide information on the number of IIFS in a country.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

12(b). Spread between reference rates and rates of return on unrestricted IAH

Definition
This PIFI intends to compare the return on the reference rate recognised by the
market with the return given by the unrestricted IAH. It provides information on the
spread and the reach of banking and near-banking IIFS in a financial system, or on

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the level of the population’s financial access through all resident branches of either
domestically incorporated parent IIFS and/or foreign-controlled parent IIFS, located
and operating in a country.

Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national
accounts do not provide information on the number of IIFS in a country.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

13(a). Spread between average return on financing and average rate of return
on restricted IAH

Definition
This PIFI intends to compare the average return on financing recognised by the
market with the average rate of return on restricted IAH. It provides information on
the spread and the reach of banking and near-banking IIFS in a financial system, or
on the level of the population’s financial access through all resident branches of
either domestically incorporated parent IIFS and/or foreign-controlled parent IIFS,
located and operating in a country.

Sources of data and issues for national compilers
Underlying data are compiled mostly from supervisory sources, while national
accounts do not provide information on the number of IIFS in a country.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

13(b). Spread between average return on financing and average rate of return
on unrestricted IAH

Definition
This PIFI intends to compare the average return on financing recognised by the
market with the average rate of return on unrestricted IAH. It provides information
on the spread and the reach of banking and near-banking IIFS in a financial system,
or the level of the population’s financial access through all resident branches of
either domestically incorporated parent IIFS and/or foreign-controlled parent IIFS,

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located and operating in a country.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

14. Ratio of funding to financing in aggregate

Definition
This PIFI intends to measure the total amount of funding (Item 6.8.20), including
SharÊ’ah compliant savings and current accounts, in the total financing that is
outstanding (Item 6.4.17).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on SharÊ’ah
compliant funding by type or in total.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated to calculate this PIFI.

15. Ratio of equity net open positions to capital
Definition
This PIFI intends to identify the equity risk exposure of IIFS compared with capital.
The numerator is the value of all positions in equities (Item 6.8.21) – that is, the sum
(positive for long positions held and negative for short positions held) of on-balance
sheet holdings of equities and notional positions in equity derivatives, applicable to
only traded or market instruments, which may include MuÌÉrabah and MushÉrakah
contracts, while the denominator is capital and reserves or owner’s equity (Item
6.6.20)

. The long and short positions must be calculated on a market value basis,

while own equity issued by the IIFS as well as equity held in associates and
unconsolidated subsidiaries (and reverse equity investments), are excluded from the
calculation. Equity risk exposure is the risk that equity price changes will affect the

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portfolio value of IIFS and hence will impact on the capital position. Equity risk
exposure is specific when it is associated with movements in the price of an
individual stock and general if it is related to movements of the stock market as a
whole. The focus is on the general market risk, since this PIFI considers the net
positions. Please refer to issues discussed under the summary of “ratio of net NPF
to capital” for more detail, especially on capital.
Sources of data and issues for national compilers
Data on net open positions in equities, which national accounts-based sources do
not provide, are most likely to be available from supervisory sources. The extent to
which the national definition is compatible with the concepts specified in the
Compilation Guide requires further consideration. Some may face difficulty compiling
the notional positions in equity derivatives that comprise notional positions for
futures and forward contracts relating to individual equities, futures relating to stock
indices, equity swaps, and the market value of equity positions underlying the option.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

16. Ratio of real assets held for sales financing to capital
Definition
This PIFI intends to identify the risk exposure of IIFS to real assets held for sales
financing compared with their capital. The numerator is the value of all positions in
real assets held for sales financing (Item 6.6.5), mostly for MurÉbahah, IjÉrah and
IstisnÉ´a contracts (preferably to be valued at market value, although the
Compilation Guide recognises the difficulty in implementing such an approach),
while the denominator is capital and reserves or owner’s equity (Item 6.6.20).
Please refer to issues discussed under the summary of “ratio of net NPF to capital”
for more detail, especially on capital.
Sources of data and issues for national compilers
Data on commodity net open positions, which national accounts-based sources do
not provide, are most likely to be available from supervisory sources. The extent to
which the national definition is compatible with the concepts specified in the
Compilation Guide requires further consideration.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

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17. Ratio of foreign currency-denominated financing to total financing

Definition
This PIFI intends to measure the total amount of foreign-currency denominated
financing (Item 6.8.19) that is outstanding out of total financing (Item 6.8.14).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

18. Ratio of foreign currency-denominated funding to total funding

Definition
This PIFI intends to measure the total amount of foreign currency-denominated
funding (Item 6.8.20) that is ex-shareholders’ equity out of total SharÊ’ah compliant
funding (Item 6.6.18).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on return on
financing by type of SharÊ’ah compliant contract.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

19. Ratio of the value of suk

Ëk positions to total capital

Definition
This PIFI intends to measure the total amount of sukËk (market value) (Item 6.8.24)
holding of IIFS out of the total amount of capital and reserves (Item 6.6.20).

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on return on
financing by type of SharÊ’ah compliant contract.

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Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

20. Percentage of Shar

Ê’ah compliant financing (by categories of

counterparty/institutional sector) in total Shar

Ê’ah compliant financing

Definition
This SIFI intends to identify the financing concentration in the SharÊ’ah categories of
counterparty or institutional sector. The numerator is the outstanding value of
financing extended for each type of SharÊ’ah compliant category of counterparty
(SNA 1993; counterparty is defined as the government, financial corporation, non-
financial corporation or non-profit institution serving households, and households),,
while the denominator is the total value of outstanding SharÊ’ah compliant financing
(including NPF and before deduction of SP) (Item 6.8.14), multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on return on
financing by type of SharÊ’ah compliant contract.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

21. Geographical distribution of Shar

Ê’ah compliant financing compared to

total Shar

Ê’ah compliant financing

Definition
This SIFI intends to identify the concentration in geographical distribution of
SharÊ’ah compliant financing. The numerator is the outstanding value of financing
extended for each country or region (Item 6.8.14(c)), while the denominator is the
total value of outstanding SharÊ’ah compliant financing (including NPF and before
deduction of SP) (Item 6.8.14), multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on return on
financing by type of SharÊ’ah compliant contract.

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22. Ratio of resident employees to branches

Definition
This SIFI intends to measure the total number of resident employees out of all
resident branches of domestically incorporated IIFS or foreign-controlled IIFS.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on the
number of IIFS in a country.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

23. Ratio of overseas employees to overseas branches

Definition
This SIFI intends to measure the total number of employees abroad out of the total
branches or banking subsidiaries abroad of domestically incorporated IIFS.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on the
number of IIFS in a country.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

24. Ratio of executive employees to total employees

Definition
This SIFI intends to measure the total of executive and above employees out of the

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total number of employees.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on the
number of IIFS in a country.

Type of aggregation and consolidation applicable

The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

25(a). Size of Islamic banking segment compared to overall financial system

Definition
This SIFI intends to measure the market value of the total Islamic banking assets,
being the summation of non-financial assets (Item 6.6.2) and financial assets (Item
6.6.3)

out of the market value of the total financial system assets, multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

25(b). Size of Islamic banking segment compared to overall banking system

Definition
This SIFI intends to measure the market value of the total Islamic banking assets,
being the summation of non-financial assets (Item 6.6.2) and financial assets (Item
6.6.3)

out of the market value of the total banking system assets, multiplied by 100.

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upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

26. Ratio of financing to GDP

Definition
This SIFI intends to measure the amount of total SharÊ’ah compliant financing (Item
6.8.14)

outstanding extended by the Islamic banking segment out of the GDP

amount, in current prices.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

27. Size of Islamic non-banking segment compared to the overall financial
system

Definition
This SIFI intends to measure the market value of total Islamic non-banking assets,
being the summation of non-financial assets and financial assets out of the market
value of the total financial system assets, multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for

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financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

28. Size of the Takaful segment compared to the overall financial system

Definition
This SIFI intends to measure the market value of total Takaful assets, being the
summation of non-financial assets and financial assets out of the market value of
the total financial system assets, multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this PIFI.

29. Ratio of gross contributions to GDP

Definition
This SIFI intends to measure the gross contribution received in terms of Takaful
premium by the Takaful segment out of the GDP amount, in current prices.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

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30. Size of the Islamic capital market segment relative to the overall financial
system

Definition
This SIFI intends to measure the market value of total Islamic capital market assets,
being the summation of non-financial assets and financial assets out of the market
value of the total financial system assets, multiplied by 100.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

31. Ratio of market capitalisation to GDP

Definition
This SIFI intends to measure the market capitalisation of SharÊ’ah compliant listed
equities and outstanding bonds at market value as at the end of the reference
period out of the GDP amount, in current prices.

Sources of data and issues for national compilers
Underlying data are compiled from either supervisory sources or monetary and
financial statistics, while national accounts do not provide information on financing
income or total income of IIFS. The extent of available underlying data will depend
upon national commercial accounting practices.

Type of aggregation and consolidation applicable
The domestically controlled, cross-border consolidated method is required for
financial soundness analysis. In addition, the domestically consolidated method can
be considered for macroeconomic linkages. Supervisory data may need to be
aggregated with some sector-wide adjustments to obtain the numerator and
denominator of this SIFI.

157

BIBLIOGRAPHY

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